FAQs On Ratings

FREQUENTLY ASKED QUESTIONS (FAQS) ON RATINGS

What is the full form of CRA?

The full form of CRA is Credit Rating Agency.

What is a credit rating agency?

A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

How is a rating denoted?

Rating is denoted by a simple alphanumeric symbol, for e.g., AA, A, A1, A2 etc.

Whether the issuer company is rated or the instrument?

The rating is assigned to a security, instrument and or a Bank loan. However, CRAs also offer ‘issuer ratings’ product which assesses the debt management capability of the entity as a whole, without reference to any specific instrument/facility. The regulation on securities are applicable mutatis mutandis to bank loans as well unless specified.

What does credit rating convey?

Credit rating is an assessment of the probability of default on payment of interest and principal of a rated debt. It is not a recommendation to buy, sell or hold a debt instrument. Rating only provides an additional input to the investor and the investor is required to make his own independent and objective analysis before arriving at an investment decision.

What are the limitations of Credit Rating?

INFOMERICS’ ratings are based on information obtained from sources believed by it to be accurate and reliable. INFOMERICS does not, however, guarantee the accuracy, adequacy or completeness of such information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Audited results generally form the starting point of analysis. However, INFOMERICS does not perform an independent ‘audit’ during the rating exercise, nor does it undertake any forensic exercise to detect fraud. On occasions, INFOMERICS may rely on unaudited financial results.

How does a credit rating agency differ from a credit bureau?

A credit rating agency provides a forward-looking opinion on future debt servicing obligations of an Issuer/borrower. A credit bureau provides information, inter-alia on regularity of past debt servicing and indebtedness of borrowers and assigns credit scores.

What are the activities that can be carried out by a credit rating agency in India?

Credit rating agencies can carry out rating activities of debt instruments, bank facilities, fixed deposits, credit quality ratings of debt mutual funds, independent credit evaluation of resolution plan (eligibility prescribed by RBI), security receipt ratings issued by ARCs (under the purview of RBI) and expected loss ratings for operational infrastructure projects. Essentially CRAs are, w.e.f. 1st June 2020, eligible to carry out only activities which are permitted/ prescribed by the financial regulators in India. They are not allowed to carry out allied activities like advisory services and information services (except industry and economic research).

How is credit rating done?

Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company’s fundamentals including business and financial analysis along with an in-depth study of the industry as well as macro-economic, regulatory, and political environment.

Can equity shares be rated?

 

No.  By definition, credit rating is an opinion on the issuer's ability and willingness to service debt. In the case of equity, since there is no pre-determined servicing obligation, equity shares cannot be assigned credit rating.

What do the various rating symbols mean?

Each rating symbol is an alphanumeric representation of the probability of degree of repayment risk associated with debt instruments.

Are rating symbols the same across all types of debt instruments?

No. Rating symbols may vary depending on the type of debt instrument, for example long term or short term.

What do the ‘+’ and ‘-‘ signs indicate in a rating?

Plus and minus symbols are used to indicate a finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations. In fact, ratings in a higher rating category such as ‘AA-‘ are stronger than ratings in a lower rating category such as ‘A+‘.

When does INFOMERICS attach 'SO / CE' suffix to a rating?

'SO/CE’ symbol is attached in case of any arrangement or structuring as a result of which there is a “credit enhancement” which enhances the standalone credit quality of an issuer. ‘CE’ is attached as long as the above arrangement/structure is from external, explicit from third party e.g. guarantee, letter of comfort, pledge of shares etc. ‘SO’ ratings are assigned in case of bankruptcy-proof structures like securitization transactions involving ‘true-sale’ of assets to an SPV.

When does INFOMERICS prefix 'Provisional' to a rating symbol?

Infomerics prefixes ‘Provisional’ symbol to a rating that is assigned pending execution of certain critical documents or steps to be taken. On execution of the said documents to the satisfaction of INFOMERICS, ‘Provisional rating’ is converted to a final rating.  Provisional ratings have a validity period of 90 days from the date of issuance of the instrument. An extension of a further period of 90 days may be granted by Infomerics in case the execution of such documents is still pending.  Please refer to INFOMERICS’ Policy on Provisional ratings for further details.

What are investment and speculative grade ratings?

An investment grade rating signifies the rating agency’s belief that the rated instrument is likely to meet its payment obligations. In the Indian context, debt instruments rated 'BBB-' [Triple B Minus] and above are classified as investment grade ratings. Instruments that are rated ‘BB+‘ [Double B Plus]  and below are classified as non-investment grade or speculative grade category ratings in which case the ability to meet the payment obligations is considered to be ‘speculative’. Instruments rated in the speculative grade are considered to carry materially higher risk and thereby a higher probability of default compared to instruments rated in the investment grade.

Who pays fees for the credit rating exercise? How does a CRA maintain its independence?

The issuer pays CRAs for the rating while investor is the key user. Like any other product or service, the 'value' of the rating depends entirely on the perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. Infomerics has majority independent Rating Committees which comprises experts in the field with an established track record in credit risk assessment. For a detailed writeup on how Infomerics manages conflicts of interest, please refer to our Policy on Conflict of Interest.

Who regulates rating agencies?

In India, credit rating agencies are regulated by Securities and Exchange Board of India (SEBI). The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest and inspection of rating agencies by SEBI, amongst other things.

Does SEBI have a role in the rating exercise?

No. SEBI does not play any role in the assessment made by the rating agency. The rating is intended to be an independent, unbiased, and professional opinion of the rating agency.

Is rating a one-time exercise?

No. To protect the interest of investors, SEBI has mandated that every credit rating agency shall, during the lifetime of the securities rated by it, continuously monitor the rating of such securities and conduct periodic reviews of all published ratings.

Why do ratings change?

Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency. However, circumstances can change significantly over time causing the rated instruments performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be revised.

What does a rating downgrade indicate?

Rating is monitored throughout the life of the instrument. A downgrade in the rating indicates that the risk of default of the instrument is higher than what was earlier predicted.

What kind of responsibility or accountability will attach to a rating agency if an investor, who makes his investment decision on the basis of its rating, incurs a loss on the investment?

A credit rating is a professional opinion given after analysing all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. There is no contract between an investor and the rating agency and the investor is free to accept or reject the opinion of the agency. : Infomerics’ ratings are based on information provided by the issuer on an ‘as is where is’ basis. Infomerics credit ratings are an opinion on the credit risk of the issue / issuer and not a recommendation to buy, hold or sell securities. Infomerics ratings are opinions on financial statements based on information provided by the management and information obtained from sources believed by it to be accurate and reliable. We, however, not guarantee the accuracy, adequacy or completeness of any information which we accepted and presumed to be free from misstatement, whether due to error or fraud. We are not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by us have paid a credit rating fee, based on the amount and type of bank facilities/instruments.

Do agencies rating small and medium enterprises, mutual funds, banks, non-banking financial institutions, insurance providers, infrastructure entities, etc. also fall under the regulatory purview of SEBI?

SEBI regulates the agencies which are engaged in the business of rating securities that are listed or proposed to be listed on a stock exchange recognized by SEBI. CRAs also carry out rating of financial instruments under the respective guidelines of financial sector regulators or any authority as may be specified by SEBI. E.g. Bank facility ratings. Rating agencies also carry out credit quality ratings of Mutual Funds and SEBI has prescribed standardized symbols for the same.

From where can the credit ratings of instruments be accessed?

Credit ratings assigned by the credit rating agencies to various instruments are made available by the agencies through press releases and on their respective websites. The same are also available in the prospectus or the offer document of the issuer company and in the media advertisements.

What are the common factors that are taken into account while awarding the credit rating?

Each credit rating agency may have its own set of criteria and varied importance for each component for assigning the ratings. Some of the common factors that may be taken into consideration for credit rating are issuer company’s market position, operational efficiency, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc. Broadly the risks analysed fall under four heads – business risk, financial risk, industry risk and management risk.

How can an investor know if a credit rating agency has changed its rating?

Credit rating agencies are required to continuously monitor the ratings assigned by them to a particular instrument/facility. All rating actions (reaffirmations, upgrades or downgrades) are disclosed through press releases and on their respective websites.

What are the measures taken by SEBI in strengthening credit rating process?

SEBI has, from time to time, taken several steps to strengthen the process of credit rating. SEBI directives require the credit rating agencies to be transparent and disclose to the public the information which may have a material bearing on the ratings, any sources of conflicts of interest while undertaking the rating exercise, rating methodology, rationale of the ratings, etc. CRAs are also required to publish their cumulative default rates and transition matrices on a standardized formula. SEBI has prescribed benchmarks for various rating categories which can be compared to the actual default rates of a credit rating agency. For example, a AAA rating has a default benchmark of nil with a tolerance level of 1% over 3-year time frame whereas a AA rating has a zero default rate benchmark for one year and two years with a 2% tolerance level in a 2-year time period.

What is the definition of ‘default’ for CRAs in India?

SEBI has prescribed a default definition wherein even a one rupee of debt obligation (with predetermined repayment schedule) not paid on due date is considered a default. In case of cash credit and other facilities with no predetermined repayment schedule, continuous overdrawal in such accounts for more than 30 days is considered default.

What is Rating Outlook/ Rating Watch? 

Rating Outlooks indicate the direction in which a rating is likely to move over a 18 to 24 month horizon. They reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. Majority of Outlooks are generally Stable. However, Positive or Negative rating outlooks do not imply that a rating change is imminent, Similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances so warrant. 

Rating Watch indicates that there is a heightened likelihood of a rating change and the likely direction of such a change in the short term is indicated in the type of Rating watch. A Rating Watch is typically event-driven and, as such, it is generally resolved over a relatively short period. The event triggering the watch may be either anticipated or have already occurred, but in both cases, the exact rating implications remain undetermined due to further information or analysis.  Rating watch can be on Positive implications (indicating a potential upgrade), Negative implications (potential downgrade), or Developing implications if the direction of the ratings is unclear. At the same time, ratings that are not on Rating Watch can be upgraded or downgraded without first being placed on Rating Watch if circumstances warrant such an action.

Can the issuer appeal if not satisfied with the rating outcome?

If the issuer is not satisfied with the rating outcome, an appeal on the decision can be constituted as per the provisions laid out in the “Policy for appeal” available on the website of Infomerics. The appeal process is applicable both for initial ratings and review of accepted ratings. In the former case, borrowers have the right not to accept the rating if not satisfied. However, ratings once accepted are not subject to acceptance and Infomerics has the right to decide on the final rating after granting the client the right to appeal against the decisions and considering such factors on merits.

What are the obligations of an Issuer/borrower as per the rating agreement? How does a credit rating agency operate given lack of adequate information from issuers?

An accurate assessment of the credit rating of an entity depends on the availability of timely, adequate and reliable information on the rated entity. Ratings are under continuous monitoring over the life of the instrument/facility, and this necessitates that CRAs have unhindered access to adequate and reliable information on the rated entity to ensure that its rating reflects the most recent credit opinion. As per the rating agreement entered into between the CRA and the client, the client undertakes to furnish all critical information which reflects it repayment capacity. The client also obligated to furnish information called for within 7 days of seeking such information.

 Absence of information significantly affects the ability of a CRA to make accurate assessment of business, financial and management risk of an entity which drives the credit rating. In case the rated entity does not provide information and/or does not facilitate interactions with key management personnel and/or lenders/auditors, that entity may be classified as Issuer Non-Cooperating (INC). For entities classified as INC, as per regulatory requirement, INFOMERICS will continue to review the ratings on an ongoing basis throughout the instrument/facility’s lifetime, on the basis of best available information.

In line with SEBI circular dated January 3, 2020, in case an issuer has an investment grade rating outstanding with INC suffix for more than six months, the rating will be necessarily downgraded to non-investment grade, with INC status.

Further, as per the above circular, in the event the issuer is non-cooperative with all other CRAs (which have an outstanding rating), for a period of 12 months or more, Infomerics shall not assign a rating a fresh rating to the issuer’s instruments/facilities.

Who are the beneficiaries of the Rating and how do Ratings benefit them?

Investors
For the investors, credit rating is an information regarding the relative ranking of the probability of default for a given debt instrument in comparison with other rated instruments. The rating provides the investors with an independent and professional opinion of the credit quality of the instrument. Rating provides an independent opinion which supplements the in-house research of organized institutional investors. Large institutional investors and others also make use of these ratings to make investment decisions. Rating press releases also come with a host of insights and views on the company and a view on the possible movement of credit and sensitivity factors thereon. As ratings are continually monitored, it presents an up-to-date assessment of the credit profile of the issuers on a real time basis.

Issuers
The issuers of rated securities are expected to have access to a wider investor base. Credit rating provides a basis for determining the returns compared to the risks involved or perceived. This could be a useful benchmark for issue pricing and result in savings in costs.

Intermediaries
Intermediaries like merchant bankers and other market players use the rating for pricing, placement and marketing the issues. The rating makes the exposure levels and risk undertaking decisions easy.

Regulators and Government
In India, RBI has adopted the Standardized approach under Basel II regime which specifies risk weights for various rating categories to determine capital adequacy of financial institutions and banks. Some regulators use ratings to specify eligibility criteria for investments. Ratings of a pool of credits and their movement over time give a good insight into the general credit worthiness of the economy and specific industries, which help the government and regulators and in fine tuning policies and regulations to achieve market stability and efficiency.