Credit Rating of Debt Instruments

8/2/2019 Credit Rating of Debt Instruments

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Credit Rating of Debt Instruments

CARE Ratings undertakes credit rating of all types of debt and related obligations.These include all types of medium and long-term debt securities such as

debentures, bonds and convertible bonds and all types of short-term debt anddeposit obligations such as commercial paper, inter-corporate deposits, fixeddeposits and certificates of deposit. CARE Ratings also provides issuer specificratings.CARE Ratings has a dedicated structured finance team, and has developed ratingmethodologies for innovative asset and mortgage backed securities in the Indiancapital market. The term 'structured financing' refers to securities where theservicing of debt and related obligations is backed by some sort of financial assetsand/or credit support from a third party to the transaction. The securities aretermed 'structured' because through specific choices relating to the type andamount of assets and particular structural features, these securities may bestructured to achieve a desired rating level. CARE Ratings assigns the suffix (SO) to

denote that the rating has been achieved by suitably structuring the transaction toenhance the credit quality of the securities and not on the basis of the credit qualityof the issuer alone.


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Rating Methodology

CARE undertakes rating exercise based on information provided by the company,in-house database and data from other sources that CARE considers reliable. CAREdoes not undertake unsolicited ratings.The primary focus of the rating exercise is to assess future cash generationcapability and their adequacy to meet debt obligations in adverse conditions.Theanalysis therefore attempts to determine the long-term fundamentals and theprobabilities of change in these fundamentals, which could affect the creditworthiness

of the borrower.The analytical framework of CARE's rating methodology is divided into twointerdependent segments. The first deals with the operational characteristics andthe second with the financial characteristics. Besides quantitative factors,qualitative aspects like assessment of management capabilities play a veryimportant role in arriving at the rating for an instrument. The relative importance ofqualitative and quantitative components of the analysis varies with the type ofissuer. Rating determination is a matter of experienced and holistic judgement,based on the relevant quantitative and qualitative factors affecting the creditquality of the issuer.CARE has well developed rating criteria for covering various sectors. These criteriaare publicly disclosed and are freely available on CARE's website www.careratings.com


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Rating Process

The rating process takes about three to four weeks, depending on the complexityof the assignment and the flow of information from the client. Rating decisionsare made by the Rating Committee.


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Rating Crit eria/ Methodology

CARE undertakes rating exercise based on

information provided by the company

In-house database and data from other sources that CARE considers reliable. CARE does not undertakeunsolicited ratings.

The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet

debt obligations in adverse conditions.

The analysis attempts to determine the long-term fundamentals and the probabilities of change in these

fundamentals, which could affect the credit-worthiness of the borrower.

The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first

deals with the operational characteristics and the second with the financial characteristics.

Besides quantitative factors, qualitative aspects like assessment of management capabilities play a very important

role in arriving at the rating for an instrument.

The relative importance of qualitative and quantitative components of the analysis vary with the type of issuer.

Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative andqualitative factors affecting the credit quality of the issuer.

WHAT RATI NGS DO NOT MEASURE

It is important to emphasise the limitations of credit ratings. They are notrecommendations to invest. They do not take into account many aspects which influencean investment decision. They do not, for example, evaluate the reasonableness of theissue price, possibilities for capital gains or take into account the liquidity in the

secondary market. Ratings also do not take into account the risk of prepayment byissuer. Although these are often related to the credit risk, the rating essentially is anopinion on the relative quality of the credit risk.


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Credit Rating of Debt instrumentsA. Long /Medium -term instruments (NCD/FD/CD/SO/CPS/RPS/L)

Symbols Rating Definition

CARE AAA

Instruments with this rating are considered to be of the best credit quality,

offering highest safety for timely servicing of debt obligations. Such

instruments carry minimal credit risk.

CARE AA

Instruments with this rating are considered to offer high safety for timely

servicing of debt obligations. Such instruments carry very low credit risk.

CARE A

Instruments with this rating are considered to offer adequate safety for

timely servicing of debt obligations. Such instruments carry low credit

risk.CARE BBB

Instruments with this rating are considered to offer moderate safety for

timely servicing of debt obligations. Such instruments carry moderate

credit risk.

CARE BB

Instruments with this rating are considered to offer inadequate safety for

timely servicing of debt obligations. Such instruments carry high credit

risk.

CARE B

Instruments with this rating are considered to offer low safety for timely

servicing of debt obligations and carry very high credit risk. SuchInstruments are susceptible to default.

CARE C

Instruments with this rating are considered to be having very high

likelihood of default in the payment of interest and principal.

CARE D

Instruments with this rating are of the lowest category. They are either in

default or are likely to be in default soon.

NCD Non Convertible DebentureFD Fixed DepositCD Certificate of Deposit

SO Structured ObligationsCPS Convertible Preference SharesRPS Redeemable Preference Shares

As instrument characteristics or debt management capability could cover a wide range of

possible attributes whereas rating is expressed only in limited number of symbols, CAREassigns '+' or '-' signs to be shown after the assigned rating (wherever necessary) to indicate

the relative position within the band covered by the rating symbol.


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B ) S h o r t Te r m I n s t r u m e n t s

Sym b o l s Ra t i n g De fi n i t io n s

PR -1Loans with this rating would have strong capacity for timely payment ofshort-term loan obligations and carry lowest credit risk. Within this

category, loans with relatively better credit characteristics are assigned PR1+ rating.

PR -2Loans with this rating would have adequate capacity for timely payment ofshort-term loan obligations and carry higher credit risk as compared toloans rated higher.

PR -3Loans with this rating would have moderate capacity for timely repaymentof short term loan obligations at the time of rating and carry higher creditrisk as compared to loans rated higher.

PR -4Loans with this rating would have inadequate capacity for timely paymentof short-term loan obligations and carry very high credit risk. Such loansare susceptible to default.

PR -5 The loan is in default or is likely to be in default on maturity.

As instru m ents cha racterist ic cou ld cover a w ide range of possible a tt ribu tes w hereas ra tin g is

expressed on ly in lim ited num ber of sym bols, CARE assigns + or - signs to be show n a fter the

assigned rating (w herever necessary ) to indicate the relative position w ithin the band covered

by the rating sym bol.

Documents

Credit Rating of Debt Instruments