1. 1. What is Credit Rating?
Credit rating an unbiased, objective and
independent opinion as to an issuer’s capacity
to meet its financial obligations. CRISIL’s
current opinion as to the relative safety of
timely payment of interest and principal on a
particular debt instrument.
CRISIL rating applies to a particular debt
obligation of the company and is not a rating
for the company as a whole. The rating also
does not constitute a recommendation to buy
/ sell or hold a particular security.
2. 2. Why seek a Credit Rating?
Ans. The process of rating is an independent,
external review of the management, its
strategies and corporate performance.
CRISIL Rating provides benefits to both
issuers and investors.
Issuers
o For the borrowing company, a CRISIL rating
assists in enhancing the marketability of the
instrument. A CRISIL rating offers an issuer
a wider range of funding alternatives as well
as the opportunity to raise money at a
relatively lower cost and from a larger body
of lenders thus leading to a broader investor
base.
3. o Highly creditworthy companies may not
necessarily be well known in the market, a CRISIL
rating can facilitate fund raising for such
companies.
o For institutional investors who usually operate
under strict investment guidelines, it is often
necessary that the securities in which they
invest, carry a credit rating assigned by a
recognized rating agency.
o A CRISIL rating also benefits an organization to
differentiate itself in the market and establish
its financial standing any time required.
4. Investors
o As rating serve as an objective guide to the risk
involved in a particular instrument, investors use
ratings to supplement their own credit evaluation
process. CRISIL ratings assist investors,
particularly in instances where they do not have the
resources or the access to management, to perform
a thorough credit risk analysis of the borrower.
o Credit rating also facilitates comparison of relative
value between competing securities. By providing a
measure of relative creditworthiness, a credit
rating can help investors decide if they wish to lend
to or invest in securities issued by a particular
5. o Issuer and to determine the return on
the investment they should demand,
given the relative degree of credit risk
involved.
6. 3. Who do our clients?
CRISIL’s Rating Methodology
CRISIL commences a rating exercise at the
request of a company. The rating methodology
involves analysis of the industry risk, the
issuer’s business and financial risks. CRISIL
assigns ratings after its assessing factors that
could affect the creditworthiness of the
borrowing entity. Typically the industry risk
assessment sets the stage for analysing more
specific company risk factors and establishing
the priority of these factors in the overall
evaluation.
7. For example, if an industry is determined to be
highly competitive, careful assessment of the
issuer’s market position is stressed. If the
company has large capital requirements,
examination of cash flow adequacy assumes
major importance.
The ratings are based on current information
provided to CRISIL by the borrowing company,
or facts obtained by CRISIL from sources it
considers reliable. In evaluating and monitoring
ratings, CRISIL employs both qualitative and
quantitative criteria in accordance with the
industry practice.
8. Ratings for Manufacturing Companies
BUSINESS RISK ANALYSIS
The rating analysis beings with an
assessment of the company’s environment
focusing on the strength of the industry
prospects, pattern of business cycles, as
well as the competitive factors affecting
that industry. The vulnerability of the
industry to Government controls and
regulations is assessed.
9. The nature of competition is different for
different industries and can be based on
price, product quality, distribution
capabilities, image, product
differentiation, service etc. Industries
characterised by steady growth in demand,
ability to maintain margins without
impairing future prospects flexibility in
the timing of capital outlays, and moderate
capital intensity are in a stronger position.
When a company participates in more than
one business, each segment is analysed
separately. A truly, diversified company
will not have a single business segment that
is dominant, and the company’s ability to
manage diverse operations will be
significant factor.
10. As a part of the industry analysis, key rating
facto are identified into keys to success and
areas of vulnerability.
The main industry and business factors
assessed include
• Industry Risk : Nature and basis of
competition, key success factors, demand
supply position, structure of industry,
cyclical/ seasonal factors, Government
policies etc.
• Market position of the issuing entity within
the industry: Market share, competitive
advantages, selling and distribution
arrangements, product and customer
diversity etc.
11. • Operating efficiency of the borrowing
entity: Locational advantages, labour
relationships, cost structure, technological
advantages and manufacturing efficiency as
compared to competitors etc.
• Legal position: Terms of the issue
document / prospectus, trustees and their
responsibilities, systems for timely
payment and for protection against fraud /
forgery etc.
12. While CRISIL does not have minimum size
criterion for any give rating level, size of
the company is critical factor in the rating
decision as smaller companies are more
vulnerable to business cycle swings as
compared to larger companies. In general,
small companies are more concentrated in
terms of product, number of customers and
geography and consequently, lack the
benefits of diversification that can be
benefit larger firms.
If the company being rated is a subsidiary or
an affiliate, that is controlled by / has
strong links with a dominant parent
company, then the rating would also include
an analysis of the parent company’s credit
quality could have an impact on the issuers
own credit quality.
13. FINANCIAL RISK ANALYSIS
After evaluating the issuer’s competitive position
and operating environment, the analysis proceeds
to analyse the financial strength of the issuer.
Financial risk is analysed largely through
quantitative means, particularly by using financial
ratios. While the past financial performance of
the issuer is important, emphasis is place on the
ability of the issuer to maintain / improve its
future financial performance.
14. As ratings rely on audited date (the rating process
does not entail auditing a company’s financial
records), the analysis of the audited financial
results begin with a review of accounting quality.
The purpose is to determine whether ratios and
statistics derived from financial statements can
be used to accurately measure a company’s
performance and its position, relative to both its
peer group and the larger universe of companies.
15. The profitability of a company is an important
determinant of its ability to withstand
business adversity as well as generate capital
internally. The main measures of profitability
studied include operating and net margins
and return on capital employed. The absolute
levels of these ratios, trends in movement of
the ratios as well as comparison of the ratios
with other competitors, is analysed. As a
rating exercise is a forward looking exercise,
more than the past, greater emphasis is laid
on the future earnings capability of the
issuer.
16. CRISIL also lays emphasis on analysis of cash
flows patterns, as it provides a better
indicator of the issuer’s debt servicing
capability compared to reported earnings. A
cash flow analysis reveals the usage of cash for
different purposes, and consequently the
extent of cash available for debt service.
The future debt claims on the issuer’s as well as
the issuer’s ability to raise capital is also
assessed in order to arrive at the level of the
issuer’s financial flexibility.
17. The area considered in financial analysis
include:
Accounting Quality : Overstatement /
understatement of profits, auditors
qualifications, method of income
recognition, inventory valuation and
depreciation policies, off Balance Sheet
liabilities etc.
Earnings protection: Sources of future
earnings growth, profitability ratios,
earnings in relation to fixed income
charges etc.
18. Adequacy of cash flows : In relation to debt
and working capital needs, stability of cash
flows, capital spending flexibility, working
capital management etc.
Financial flexibility : alternative financing
plans in times of stress, ability to raise
funds, asset deployment potential etc.
Interest and Tax sensitivity : exposure to
interest rate changes, tax law changes and
hedge against interest rates etc.
19. MANAGEMENT RISK
A proper assessment of debt protection
levels requires an evaluation of the
management philosophies and its strategies.
The analyst compares the company’s
business strategies and financial plans (over
a period of time) to provide insights into a
management’s abilities with respect to
forecasting and implementing of plans.
Specific areas reviewed include:
Track Record of the management : planning
and control systems, depth of managerial
talent, succession plans.
Evaluation of capacity to overcome adverse
situations.
Goals, philosophy and strategies.
20. How Does the Ratings Process Work?
Ans.
• Rating Agreement and Assignment of
the Analytical Team
• Management Meeting
• Rating Committee
• Communication to the Issuer
• Dissemination to the Public
