credit retting agencies

8/2/2019 Credit Retting Agencies

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PRESENTED BY:-

Bhavin Ramani

Jignesh Sharma

Shaurin Mehta

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A Credit rating agency (CRA) is a companythat assigns credit ratings for issuers of

certain types of debt obligations as well as thedebt instruments themselves. In some cases,the servicers of the underlying debt are alsogiven ratings.

In most cases, the issuers of securities are

companies, special purpose entities, stateand local governments, non-profitorganizations, or national governmentsissuing debt-like securities that can be tradedon a secondary market.

A credit rating for an issuer takes intoconsideration the issuer's credit worthiness(i.e., its ability to pay back a loan), and affectsthe interest rate applied to the particularsecurity being issued

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Credit rating agencies (CRAs) play a key role in

financial markets by helping to reduce the

informative asymmetry between lenders and

investors, on one side, and issuers on the other

side, about the creditworthiness of companies

or countries.

CRAs' role has expanded with financial

globalization and has received an additional

boost from Basel II which incorporates the

ratings of CRAs into the rules for setting

weights for credit risk.

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The basic objective of credit rating is to

provide an opinion on the relative credit risk

associated with the instrument being rated.

The process, in a nutshell, involvesestimating the issuers capacity to generate

cash from operations and assessing the

adequacy of this estimate vis--vis the

issuers debt servicing obligations over thetenure of the instrument.

Credit rating agencies specialize in analysing

and evaluating the creditworthiness of

corporate and sovereign issuers of debtsecurities. In the new financial architecture,

CRAs are expected to become more

important in the management of both

corporate and sovereign credit risk

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All factors that have a bearing on the issuers

ability to generate cash flows are considered

while assigning ratings.

Conceptually, these factors may be classified

as business risk, financial risk drivers, and

management related factors.

ICRAs rating process places considerable

emphasis on evaluating business risks, as it

does on evaluating the financial ratios.

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For credit risk evaluation, stable businesses

(low industry risk) even with lower level of

cash generation are viewed more favourablyas compared with businesses with higher

cash generation potential but relatively high

degree of volatility associated with such cash

flows (higher industry risk).

In India these Credit rating agencies are

ICRA, CRISIL, CARE and internationally

FITCH,S&P and Moddys

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Investor protection via independent, 3rd party

opinion on the credit risk or default risk ofissuers/issues

Distill complex financial structures into user-

friendly symbols

Provide a common yardstick to evaluatedefault risk for

investment decision making

Monitor and disseminate credit opinions on

rated issuers/issues in a timely and efficientmanner

Bridge the information gap between issuers

and investors and a source of credit

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Strong regulatory supports

Financial viability

Strong and supportive shareholder

Independence

Innovation

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OIL and GAS Rating System by Moddys

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Political Risk Income and economic structure

Economic growth prospects

Fiscal Flexibility

General government burden

Offshore and contingent liability

Monetary flexibility

External flexibility External debt burden

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Credit rating agencies do not downgradecompanies promptly enough

Large corporate rating agencies have beencriticized for having too familiar a relationshipwith company management, possibly opening

themselves to undue influence or thevulnerability of being misled

While often accused of being too close tocompany management of their existing

clients, CRAs have also been accused ofengaging in heavy-handed "blackmail" tacticsin order to solicit business from new clients,and lowering ratings for those firms

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Ratings agencies, in particular Fitch, Moody'sand Standard and Poors have been implicitlyallowed by governments to fill a quasi-

regulatory role, but because they are for-profit entities their incentives may bemisaligned.

Rating agencies have come under criticism for

a narrow-minded view of government defaultfrom investors' perspective.

It has also been suggested that the creditagencies are conflicted in assigning sovereigncredit ratings since they have a politicalincentive to show they do not need stricterregulation by being overly critical in theirassessment of governments they regulat

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THANK YOU.

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credit retting agencies

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