Credit Rating

2. Presentation on
Rating concepts and methodologies
CA Smita Rajpurkar
Date June 28, 2014

3. About CARE

4. 4
Key Business Lines
Ratings Grading
Corporate
 Debt
 Bank Loan
 Issuer
 Corporate
Governance
 Recovery
Financial Sector
 Banks
 NBFCs
 Housing
Finance
 Insurance
 Mutual Funds
 Securitization
Public Finance
 State
Entities
 ULBs
 IPO
 Shipyard
 ESCO
 Education
 Broker
 Maritime
 RESCO
 Construction
 Real Estate
 Equigrade
Infrastructure
Sector
 Power
 Roads
 Ports
MSME
 NSIC – SSI
Rating
 SME Rating

5. 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

6. 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

7. Mr. Y. H. Malegam Chairman
Former 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

8. Agenda
1. Concept of Credit Rating
2. Rating Scale
3. Rating Process
4. Key Risk Factors
5. Promoter and Management Evaluation
6. Industry Risk
7. Operational Factors
8. Project Risk
9. Financial Risk
10. Due Diligence
11. Facilities covered under rating
12. Surveillance of accepted Ratings
13. Approach to Ratings
14. Ratings Statistics
15. Key rating factors – Construction/Roads/Real Estate

9. “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

10. Rating Scale
Investment Grade Speculative Grade
Long
Term
Short
Term
AAA
AA
A
BBB
BB
B
C
D
A1+
A1
A2
A3
A4
D

11. Rating Process

12. Key Risk Factors
Promoters and Management Evaluation
Industry Risk
Operational Risk
Project Risk
Financial Analysis
Due Diligence
Peer Comparison

13. Promoters and Management Profile
Experience in the industry / related industries
Qualification of management
Independence of management
Resourcefulness of promoters
Integrity and track record
Ability to perform/deliver under stress

14. Industry Risk
Peculiarities of the industry
Cyclical / non-cyclical
Seasonal / Perennial
Regulated / semi regulated
Competitive / Oligopolistic / Monopolistic
Capital / Technology / Labour intensive
Any specific accounting policies / practices
Raw Material/ Fuel /Finished goods
Need for long-term tie-up
Dependence on imports/exports
Entity vis-à-vis Industry
Position in value chain within industry
Position and Size with respect to other players

15. Operational Factors
Location of the plant / site
Operating Risks
Age of Plant and Machinery
Level of Technology
Labour
Utilities Arrangements
Level of Integration
Range of Products offered
Raw Material Supply Agreements
Marketing/Sale/Distribution Arrangements
Off-taker Profile Evaluation (counter party risk)
Concentration /diversity of customer

16. Project Risk
Integration of Project w.r.t Entity’s existing set-up
Size of Project vis-à-vis current level of operations of entity
Source of financing of project
Impact on current financial position
Cost of project vis-à-vis industry norms
Financial closure
Equipment supply and Technology
Raw material/fuel supply arrangements
Marketing / product off-take arrangements
Clearances
Progress of the project (cost, milestones achieved, timelines
etc)

17. Financial Risk
Analysis of Past as well as projected trend
Revenue - growth, contribution, volatility
Movement of major cost heads
Gross, PBILDT, Operating, PAT Margins
Working Capital levels & Liquidity position
Quality of current assets and investments
Cash flows – Past and Future
Ratios
Profitability
Capital structure and Solvency
Coverage ratios (Interest and DSCR)

18. Due Diligence
Interaction with Auditors
Adherence to accounting standards and policies
Internal controls of the company
Repayment of dues
Any other issues coming up in audit
Interaction with Bankers
Track record of repayment
Status of account (standard, NPA etc)
Internal Rating
Interest rate charged

19. Facilities covered under rating
Long term Bank Facilities
LT Rupee Term Loan
Foreign Currency Borrowings
Fund 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 loan
ST Loans
Any other ST borrowings

20. Surveillance
Continuous– any major developments affecting the credit
profile of the entity
Annual Surveillance (On expiry of one year from date of
initial rating exercise ) - Full fledged review
Quarterly
Limited review
Quarterly results
Due Diligence
Key developments

21. Approach to rating
Should 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.

22. 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.

23. Key rating factors – Construction
Expected infra spending, industrial and realty growth
driving demand
Size and past track record
Revenue visibility – Order book to Gross Sales
Type of contracts
Execution capability
Cash flow extremely critical

24. Key rating factors – Roads
Sponsor related Risk
Project execution Risk
Revenue Risk
O&M Risk
Regulatory & Political Risk

25. Key rating factors – Real Estate
Business model adopted
Project specific analysis
Funding risk
Marketing risk
Emphasis on cash flow analysis
Key financial ratios analyzed
Collection efficiency
Cash coverage ratio
Debt: Equity:Customer Advances ratio
Visibility of customer advances to fund balance cost of
construction and debt payments

26. Q & A

27. THANK YOU
27