credit rating
DESCRIPTION
Credit RatingTRANSCRIPT
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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