Credit Rating

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Credit Rating
By- Rahul Jain
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What is a credit rating?

• A credit rating is an opinion on the relative
  degree of risk associated with timely payment of
  interest and principal on a debt instrument. A
  simple alphanumeric symbol is normally used to
  convey a credit rating.

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Credit rating is an input for decision making

• A credit rating is not a recommendation to buy,
  hold or sell a debt instrument. A rating is one
  of the inputs that is used by investors to make
  an investment decision.
• Investors also look at the returns being offered
  on the debt instrument. Normally investors expect
  higher returns for lower rated instruments to
  compensate for the increased risk profile. Rating
  agencies do not comment on the return being
  offered on a debt instrument. Also, investors use
  several other factors like level of portfolio
  diversification and liquidity levels of the
  instrument etc. in making investment decisions.

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Need of Credit rating

• SOURCE OF FUNDS USE OF FUNDS
• Depositors Borrowers

• Bank provides liquidity
• Bank assumes credit risk
• Bank undertakes credit assessments

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Need of Credit rating

• SOURCE OF FUNDS USE OF FUNDS
• Investors Issuers

• Market provides liquidity
• Investors assume credit risk
• Credit rating service provides measure of credit
  risk

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Asian Debt Market Activity - 2002 Aggregate of
Cross-Border Bond, Domestic Bond and Loan Market
Source Thomson Financial
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Issues

1. Transparency and disclosure
2. Protection of creditor rights
3. Global scale vs National scale

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SEBI-Regulator

• The capital market regulator regulates rating
  agencies in most regions. In India, the capital
  markets regulator, the Securities and Exchange
  Board of India (SEBI), regulates the rating
  agencies in the country. SEBI laid down an
  extensive set of regulations for rating agencies
  in 1999.

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Why do ratings change?

• Ratings are assigned based on certain
  expectations and assumptions about variables that
  impact the issuers performance.
• These variables are either company-specific
  factors or factors relating to the business
  environment. Rating agencies use their best
  professional judgment on these factors while
  assigning the rating. However, these variables
  can change significantly over a relatively short
  time-frame, especially in emerging markets,
  causing the rated entities performance to
  deviate materially from expectations. This
  changes their future debt repayment capabilities
  and is reflected in their changed ratings.

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Rating Process
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Global Vs. National Rating Scales
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Standard Poors Asia-Pacific Network 2003
Standard Poors Hong Kong Melbourne Seoul Sing
apore Sydney Tokyo Staff - 320 Affiliates CRISIL
(Mumbai) PEFINDO (Jakarta) PhilRatings
(Manila) TRC (Taipei)
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Average Cumulative15-Year Default Rates ()
Source Standard Poors