PRESENTED BY Riniksha Rishi Suman Pramanik

DEFINATION: It is the symbolic indicator of the opinion of the

rating agency regarding relative ability and willingness of the issuer of a financial (debt)instrument to meet the service obligation as they arise. Provides a simple system of grading by which relative capacities of the companies to make timely repayment of interest and principal on a particular type of debt/ financial instrument can be noted.

Rating process and methodology

Procedure/Process:-

All the four rating agencies adopt a similar rating process. The steps are 1. New issues/ instruments. 2. Review of rating. 3. Flow chart of rating.

Rating process of New issues:-

Following steps are involved in rating the issuer of instrument for first time. Rating agreement and assignment of analytical team Issue of rating request letter by issuer of Instrument and signing of rating agreement. Credit rating agency(CRA) assigns an analytical team, comprising two or more analysts, one of them would be lead analysts and would serve as issuer primary contract.

CONTD

 Meeting with Management

Before meeting, the team obtains and analyses information relating to cash flow projections, financial statements other relevant information like Annual reports for past 5 years and interim report of past 3 years. Two copies of latest prospectus offering statement and applications for listings on any major stock exchanges. Consolidated financial statements for the Past three fiscal years by principal, subsidiary or division.
CONTD..

Two copies of the statement of projected sources

and application of funds, balance sheets , operating Statements for at least the next three years. Copies of existing loan agreement along with recent compliance of outstanding debt issues , copies of compliance letters required by indenture of such should be also published. Rating Committee After meeting with the management , the analysts present their report to a rating committee, which then decides the rating. The rating arrives after a composite assessment of all the factors concerning the Issuer.

 Communication to the issue

After the committee has assigned the rating , the rating decision is communicated to the issuer, with a reason or rationale supporting the rating.

Dissemination to the public

After acceptance of the issuer , CRA disseminates the rating along with rationale through print media.

Rating reviews for possible change:o New data of the company

o Rating change

o Credit rating watch

Methodology:For manufacturing companies Business risk analysis Industry risk Market position of issuing entity within indusry Operating efficiency of the borrowing entity Legal position

 Financial risk analysis Accounting quality Earning prospects Adequacy of cash flow Financial flexibility Interest and tax sensitivity Management risk analysis Track record of the management planning and control systems, depth of managerial talent, succession plan. Evaluation of the capacity to overcome adverse situation Goals, philosophies and strategies

Financial services sector

Regulatory and competitive environment Structure and regulatory framework of financial system Trends in regulation /deregulation and their impact on company Fundamental analysis:Capital adequacy Resources Asset quality Liquidity management Profitability and financial position Interest and tax sensitivity

Care rating symbol

The rating instrument of CARE illustrated here relate to Long term and midterm Short term Credit analysis Long term loans Short term loans Collective investment schemes Grading of construction entities

Long term and midterm instruments The characteristics of these instruments could cover a

wide range of possible attributes where rating is expressed only by 8 symbols. The suffixes (FD/CD/SO)/(CCP)refer to different long term and medium term instruments like fixed deposit, certificates of deposits, structured obligations and cumulative convertible preferences shares. CARE AAA,CARE AAA (FD)/(CD)/(SO)/(CCP)Instruments carrying this rating are considered to be of best quality , carrying negligible amount of risk. Debt service payments are protected by stable cash flows, with a good margin.

CARE AA,CARE AA(FD)/(CD)/(SO)/(CCP) Here instruments are judged to be of high quality by all standards. They are rated lower than the CARE AAA because of lower margin protection CARE A, CARE A(FD)/(CD)/(SO)/(CCP) Instruments are considered upper medium grade and have many favorable investment. CARE BBB,CARE BBB(FD)/(CD)/(SO)/(CCP) Such instruments are considered to be of investment grade. They indicate sufficient safety for payment ofinterest and principal at the timew of rating.

CARE BB,CARE BB(FD)/(CD)/(SO)/(CCP) such instruments are considered to be speculative , with inadequate protection for interest and principal payments. CARE B,CARE B(FD)/(CD)/(SO)/(CCP) instruments with such ratings are generally classified as susceptible to default. adverse changes in business are likely to lead to default. CARE C,CARE C(FD)/(CD)/(SO)/(CCP) such instruments carry high investment risk with a likelihood of default in the payment of the interest and principal. CARE D,CARE D(FD)/(CD)/(SO)/(CCP) such instruments are of lowest category they are either in default or are likely to be in default soon.

 SHORT TERM INSTRUMENTS

The CARE rates short term instruments in VARIOUS categories:

1) PR1:

These would have superior capacity for repayment of short term promissory obligations. Issue of such instruments will normally be characterized by leading market positions in established industries.

2) PR2: 3) PR3:

These would have strong capacity for repayment of short term promissory obligations. These have an adequate capacity for repayment of short term promissory obligations.

 CRADIT ANALYSIS RATING(CAR)

The rating symbols relating to CAR are :

CAR1 :
CAR2:

Excellent debt management capacity. Such companies will normally be leaders in their respective industries.

a very good debt management capacity . These companies are normally regarded as close to those rated CAR1.

CAR3:

good capability in debt management. Such companies are considered medium grade .

 LONG TERM LOANS

Rating is expressed only in limited number of symbols , CARE assigns + or - signs to be shown after the assigned rating to indicate the relative position: CARE AAA(L): loans carrying this rating are considered to be the best quality, carrying negligible investment risk. CARE AA(L): Loans carrying this rating are judged to be of high quality by all standards.

 CARE A(L): loans with this rating are considered upper medium grade and have many favorable investment attributes SHORT TERM LOANS The rating symbols are : PL1: superior capacity for repayment of interest and principle on the loan.

PL2:

strong capacity for repayment of interest anr=d principle on the loan. They are rated lower because of lower margin of protection.

 PL3:

Adequate capacity for repayment of interest and principle on the loan.

PL4:

Minimal degree of safety regarding timely payment of interest and principal.

PL5:

the loan is in default or is likely to be in default on maturity.

 COLLECTIVE INVESTMENT SCHEMES

The symbols are: CARE1(CIS): Schemes carrying this rating are considered to be very strong , with a high likelihood of achieving their objectives and meeting obligations to investors. CARE2(CIS): schemes carrying this rating are considered to be strong . They are rated lower because of relatively higher risk.

 CARE3(CIS):

CARE4(CIS):

Such schemes are considered to have adequate strength for achieving their objectives and meeting their obligations to investors. schemes carrying this rating are considered to have inadequate capability to achieve their objectives and meet their obligations to investors.

CARE5(CIS):

Such schemes are considered weak and unlikely to achieve their objectives and meet their obligations.

GRADING OF CONSTRUCTION ENTITIES

Grading of the construction entities is an opinion regarding the ability of the entity to carry out the stated objectives within the specific time frame. Entities in the construction sector have been broadly divided into four categories for the grading process and these are :
Project developers Project consultants Construction contractors The project.

 Grading of project developers:

CD1 Competence in project management &arranging adequate fund for project is very high. CD2-- Same as previous one, but marginally lower. CD3 Backing (project management or funding)for the project is moderate CD4- Backing for the project is inadequate. CD5- Track record in managing and completing project is poor.

 Grading of project consultants:

CC1- Technical, design and engineering are very high. CC2- Marginally lower than CC1. CC3- Technical, design and engineering strengths are moderate. CC4- Strengths are inadequate, ability to pay liquidated damages in event of non performing assets are inadequate.

CC5- All the strengths are poor.

 Grading for construction contractor:

CCt1-Project execution capabilities are extremely high. CCt2-Marginally lower than CCt1. CCt3-Project execution capabilities are moderate. CCt4-Project execution capabilities are inadequate. CCt5-Project execution capabilities are poor.

 Grading of the project:

CP1- Project is very good, all risks have been identified and measures taken to contain these risks. CP2- Good project .marginally lower than CP1. CP3- Moderate project. Risks are moderate. CP4- Weak project. Risk factors are high. CP5- Poor project. Chances of failure are very high.