credit rating

Presentation on Rating concepts and methodologies

CA Smita Rajpurkar Date June 28, 2014

About CARE

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Key Business Lines

RatingsRatings GradingGrading

CorporateCorporate

Debt Bank Loan Issuer Corporate

Governance Recovery

Debt Bank Loan Issuer Corporate

Governance Recovery

Financial SectorFinancial Sector

Banks NBFCs Housing

Finance Insurance Mutual Funds Securitization

Banks NBFCs Housing

Finance Insurance Mutual Funds Securitization

Public FinancePublic Finance

State Entities ULBs

State Entities ULBs

IPO Shipyard ESCO Education Broker Maritime RESCO Construction Real Estate Equigrade

IPO Shipyard ESCO Education Broker Maritime RESCO Construction Real Estate Equigrade

Infrastructure Sector

Infrastructure Sector

Power Roads Ports

Power Roads Ports

MSMEMSME

NSIC – SSI Rating

SME Rating

NSIC – SSI Rating

SME Rating

CARE enters into Third Party Agreements (TPA) with practicing Chartered Accountants and other agencies on revenue sharing basis.

Appointment terms:

The CPs are appointed on contract basis to create and promote awareness and disseminate information on CARE’s Rating services.

The arrangement is valid for a period of six months and may be renewed at the discretion of CARE, on mutually agreeable terms.

Channel Partners

International Forays

MoUs

ARC

Branch operations

Technical assistance in Ecuador, Nigeria, Mexico & Nepal**Proposed

Maldives in 2011

Member of Global Rating Agency (along with CRAs in Brazil, Portugal, Malaysia & South Africa)

Recognition by International Central Banks

• Bank of Mauritius• Hong-Kong Monetary Authority

Mr. Y. H. Malegam ChairmanFormer Managing Partner, S.B. Billimoria & Co.; Member of Board of Directors of a number of companies and organizations including Reserve Bank of India

Mr. V. Leeladhar Former Dy. Governor, Reserve Bank of India. Has also served as Chairman and MD of UBI and Vijaya Bank

Mr. V.K. Chopra Former Wholetime Member of Securities & Exchange Board of India and Chairman and Managing Director of Corporation Bank.

Mr.P.P.Pattanayak Former Managing Director of State Bank of Mysore. Former Dy. Managing Director & Chief Credit Officer of State Bank of India

Mr. D. R. Dogra MD & CEO

An Independent External Rating Committee

Agenda1. Concept of Credit Rating2. Rating Scale3. Rating Process4. Key Risk Factors5. Promoter and Management Evaluation6. Industry Risk7. Operational Factors8. Project Risk9. Financial Risk10. Due Diligence11. Facilities covered under rating12. Surveillance of accepted Ratings13. Approach to Ratings14. Ratings Statistics15. Key rating factors – Construction/Roads/Real Estate

“Credit rating is, essentially, an independent, unbiased and objective opinion on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise.”

Concept of credit ratings

Rating ScaleInvestment Grade Speculative Grade

LongTerm

ShortTerm

AAA

AA

A

BBB

BB

B

C

D

A1+

A1

A2

A3

A4

D

Rating Process

Key Risk FactorsPromoters and Management EvaluationIndustry RiskOperational RiskProject RiskFinancial AnalysisDue DiligencePeer Comparison

Promoters and Management ProfileExperience in the industry / related industriesQualification of managementIndependence of managementResourcefulness of promotersIntegrity and track recordAbility to perform/deliver under stress

Industry RiskPeculiarities of the industry

Cyclical / non-cyclicalSeasonal / Perennial Regulated / semi regulatedCompetitive / Oligopolistic / MonopolisticCapital / Technology / Labour intensiveAny specific accounting policies / practices

Raw Material/ Fuel /Finished goodsNeed for long-term tie-upDependence on imports/exports

Entity vis-à-vis IndustryPosition in value chain within industryPosition and Size with respect to other players

Operational Factors

Location of the plant / siteOperating Risks

Age of Plant and MachineryLevel of TechnologyLabourUtilities ArrangementsLevel of IntegrationRange of Products offered

Raw Material Supply AgreementsMarketing/Sale/Distribution ArrangementsOff-taker Profile Evaluation (counter party risk)

Concentration /diversity of customer

Project RiskIntegration of Project w.r.t Entity’s existing set-upSize of Project vis-à-vis current level of operations of entitySource of financing of project

Impact on current financial positionCost of project vis-à-vis industry normsFinancial closureEquipment supply and Technology Raw material/fuel supply arrangementsMarketing / product off-take arrangementsClearancesProgress of the project (cost, milestones achieved, timelines

etc)

Financial RiskAnalysis of Past as well as projected trend

Revenue - growth, contribution, volatilityMovement of major cost headsGross, PBILDT, Operating, PAT MarginsWorking Capital levels & Liquidity positionQuality of current assets and investmentsCash flows – Past and Future

RatiosProfitabilityCapital structure and SolvencyCoverage ratios (Interest and DSCR)

Due DiligenceInteraction with Auditors

Adherence to accounting standards and policiesInternal controls of the companyRepayment of duesAny other issues coming up in audit

Interaction with BankersTrack record of repaymentStatus of account (standard, NPA etc)Internal RatingInterest rate charged

Facilities covered under ratingLong term Bank Facilities

LT Rupee Term LoanForeign Currency BorrowingsFund based working capital borrowings (Cash credit, etc)Any other LT borrowings

Short term Bank Facilities Non fund based working capital facilities (LC, BG etc)Working capital demand loanST LoansAny other ST borrowings

SurveillanceContinuous– any major developments affecting the credit

profile of the entityAnnual Surveillance (On expiry of one year from date of

initial rating exercise ) - Full fledged reviewQuarterly

Limited reviewQuarterly resultsDue DiligenceKey developments

Approach to ratingShould not be viewed as a cost.It is not a mere compliance exercise. Companies should invest time and effort to prepare

information.Plant visit and detailed discussions with Management.Ask for key rating considerations before accepting the

rating. Update the rating agency constantly on the

developments, positive or negative.

Rating statistics MCR is the ratio of (upgrades and reaffirmations) to (downgrades and reaffirmations). An increase in

MCR denotes an increase in upgrades vis-a-vis downgrades while a decrease in MCR shows the

reverse. Therefore, an increase in the MCR implies stable and improving credit quality of the rated

entities. An MCR closer to one indicates higher stability in ratings, with larger proportion of

reaffirmations.

Key rating factors – ConstructionExpected infra spending, industrial and realty growth

driving demandSize and past track recordRevenue visibility – Order book to Gross SalesType of contractsExecution capabilityCash flow extremely critical

Key rating factors – RoadsSponsor related RiskProject execution RiskRevenue RiskO&M RiskRegulatory & Political Risk

Key rating factors – Real EstateBusiness model adopted Project specific analysisFunding risk Marketing riskEmphasis on cash flow analysisKey financial ratios analyzed

Collection efficiency Cash coverage ratioDebt: Equity:Customer Advances ratioVisibility of customer advances to fund balance cost of

construction and debt payments

Q & A

THANK YOU

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