Process of Credit rating of Financial instruments and steps in credit rating

1. Process of Credit rating of
Financial instruments
Prepared by
Nikhil B
Student of VSKU
Bellary

2. Introduction
The history of rating is more than a century old.
The rating agencies came to limelight when there
were high levels of default in US Capital Market after
depression.
During the course of time, market regulators
started insisting on the issuers of instruments to get
their issues rated from credit (bond) rating agencies.

3. Since 1987, Credit Rating agencies in India
have been playing a significant role in Indian
capital market.
credit rating, as already pointed out, is an
opinion on the ability of issuer of financial
instrument to meet its debt obligations as per
the pre-determined scheduled.

4. Credit Rating Agency Means
According to section 2(1)(h) of SEBI (credit
Rating Agencies) Regulations, 1999, Credit
Rating Agency means a body corporate which
is engaged in, or proposes to be engaged in,
the business of rating of securities offered by
way of public or right issue.

5. Credit Rating Agency:
According to section 2(1)(h) of SEBI (Credit
Rating Agencies) Regulations, 1999, Rating is
an opinion regarding securities, expressed in
the form of standard symbols or in any other
standardised manner, assigned by a credit
rating agency and issued by the issuer of such
securities, to comply with a requirement
specified by these regulations.

6. ICRA views
Credit rating as a simple and easy to
understand symbolic indicator of the opinion of
a credit rating agency about the risk involved in
a borrowing programme of an issuer with
reference to the capacity of the issuer to repay
the debt as per terms of issue. This is neither a
general purpose evaluation of the company nor
a recommendation to buy, hold or sell a debt
instrument.

7. Process of Credit Rating
or
Steps in Credit Rating

8. • Submission of letter of intent
• Constitution of analytical team
• Collection of Information
• Plant Visits and Management Meetings
• Preview Meeting
• Rating Committee Meeting
• Communication of the Rating to the
issuer-company

9. • Rating Review
• Dissemination to the public
• Surveillance

10. Submission of letter of intent
The rating process begins at the request of borrower or
issuer-company. The request from the issuer company is a pre-
requisite for the rating agency to start its functions.
They (i.e. Rating Agency) take up this responsibility only
after the receipt of specific letter of intent from the issuer company
to this effect. It may be noted here that the submission of letter of
intent/request by the issuer company to rating agency is to
indicate the willingness of the issuer-company to volunteer itself to
get its financial instruments rated by the credit rating agency.
This request is the foundation for the process which binds
both the parties on some significant aspects. It also binds the
issuing company to pay the fee and to provide all the required
material information to assess and rate.

11. It is also to be noted here that the issuing company has the
right, certainly not an obligation, to accept or reject the rating
assigned by the rating agency
Issuer company as already stated, has to pay the initial and
non-refundable fee. The annual surveillance fee is to be paid from
the second year if the rating is accepted by the issuer-company.

12. Construction of Analytical Team
After the receipt of letter of intent from a company, the
rating agency constitutes its team of experts called analytical
team.
The team is constituted by including at least two
members, besides others, who are familiar with the industry to
which the issuer-company belongs.
As the team plays a prominent role in the rating process.
Because, this team is responsible for analysing various aspects
of the company having a bearing on the financial soundness,
safety, ability to honour its contractual obligations, etc
Team also finalises the rating recommendation. As the
work of the team is voluminous, the team is supported by back-
up team of the rating agency

13. Collection Of Information
Based on its in-house preliminary work, the rating agency prepares and
submits to issuer company a list of reports/ documents/ information required to
submitted to it and also a board framework for discussion.
As per this schedule, the issuer-company has to collect all the details,
prepare necessary reports and submit the same to the rating agency and be
ready with necessary information for the discussion meeting with the team of
rating agency.
It may be noted at this stage of analysis that, every rating agency has a
comprehensive in house data base on the industry and economy. It is also
assisted by industry experts.
it obtains the necessary and useful information on trends and policies in
a particular industry. The experts’ team conducts basic research on the basis of
documents furnished by the issuer company and data gathered from in-house
data base. By the end of this stage, the team will be having necessary details in
the form of information, reports, documents, projections, etc which become the
base for identification of key areas/ issues for discussion with the management
of the company.

14. Plant Visits and Management Meetings
The analytical team visits the plant to get the first hand information
on the working operational efficiency of the issuer-company and to validate
the information furnished and reports submitted by the issuer-company.
Because, plant visit facilitates understanding of production process,
assessing the quality of equipment and facilities, cost of production and
quality of product, quality of technical personnel, etc.
Team, after on-site study of various aspects, arranges for meetings
with management at different levels. Intensive interaction with management
is held on wide ranging issues are having a bearing on rating.
The discussion covers the topics like historical performance,
strategies and financial policies, competitive position, prospective plans and
future outlook, business risk profile, etc.
The team experts of credit rating agency also meet the key officials
(CEO, CFO, Head of Marketing, HR Department etc) and discuss important
aspects/ issues to obtain a clear idea about the preparedness of issuer-
company to meet its financial obligations.

15. Preview Meeting
After completion of plant visit and discussion
with management on critical aspects/issues, the
rating agency arranges for preview meeting. This
preview meeting is in the form of internal discussion
wherein the experts’ team interacts with the back-up
team is required to have collected the necessary
information separately. Hence interaction of experts’
team with the back-up team enables it to have a
SWOT analysis of issuer-company. Then the
findings are discussed at length with senior
executives of the rating agency.

16. Rating Committee Meeting
Rating committee is an apex committee of
rating agency empowered to take decision on
rating. This committee comprises of at least four
members. The rating committee considers the
relevant quantitative and qualitative information
presented by the analytical team to arrive at the
rating that most appropriately reflects both the
current situation and prospective performance.
After considering all the details, the rating
committee finally takes a decision on rating.

17. Communication of the rating to the issuer
company
The rating assigned by the rating committee
will be communicated by the rating agency to the
issuer-company with a detailed rationale justifying
the rating assigned.

18. Rating Review
If the issuing company is not satisfied with the
rating assigned, it may make an appeal with the
objections supported by justification in the form of facts
and figures. If the rating agency receives the appeal,
(i.e. Rating agency) directs the rating committee to
review the rating. Then, rating committee reviews the
rating in the light of objections field by the issuer-
company (supported by justification with facts and
figure). Based on this comprehensive review, the rating
committee takes the final decision either retaining earlier
rating or upgrading the rating in the light of the additional
supporting information provided by the management of
issuer-company.

19. Dissemination to the Public
On the acceptance of the rating by the
issuer-company(with or without appeal), it is
published in the official document of the rating
agency and put on its (i.e. rating agency) website.
Further, information (i.e. Rating) is disseminated
to general public through other public print and
e-media.

20. Survelliance
Once the rating is accepted by the issuer-
company, the rated instrument will be put under
surveillance over the life of the instruments. Every
rating agency has its own research division which
complies the relevant and necessary data on
economy industry and the company.
Rating is reviewed, formally, once in a year.
A review can also be triggered whenever there is
a major development in issuer-company or in the
industry having significant bearing on the
creditwothniess of the company.

21. CRISIL’S Rating Process

22. ICRA’s Rating Process

23. Any Queris

24. Thank You