FAQ’s – Credit Rating
1. What is Credit Rating?
Credit rating is essentially the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise.
2. What are the benefits of getting rated?
A rating provides an independent opinion on the entity getting rated. CRNL will provide high quality rating based on the expertise built by its parent CARE Ratings with almost 25 years of rating experience.
Rating can be used by lenders / deposit holders / bond investors of the company prior to taking exposure in the rated entity. Rating is supported by a Rating Rationale that provides a detailed analysis on the rated entity and can be used by the company with its stakeholders.
3. Why do rating agencies use symbols like AAA, AA, rather than give marks or descriptive credit opinion?
The great advantage of rating symbols is their simplicity, which facilitates universal understanding. Rating companies also publish explanations for their symbols used as well as the rationale for the ratings assigned by them, to facilitate deeper understanding.
4. Does credit rating constitute an advice to the investors to buy?
It does not. The reason is that some factors, which are of significance to an investor in arriving at an investment decision, are not taken into account by rating agencies. These include reasonableness of the issue price or the coupon rate, secondary market liquidity and pre-payment risk. Further, different investors have different views regarding the level of risk to be taken and rating agencies can only express their views on the relative credit risk.
5. 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 studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. Further, there is no privity of contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency. Nevertheless, rating is essentially an investor service and a rating agency is expected to maintain the highest possible level of analytical competence and integrity. In the long run, the credibility of a rating agency has to be built, brick by brick, on the quality of its services.
6. How reliable and consistent is the rating process? How do rating agencies eliminate the subjective element in rating?
To answer the second question first, it is neither possible nor even desirable, to totally eliminate the subjective element. Ratings do not come out of a pre-determined mathematical formula, which fixes the relevant variables as well as the weights attached to each one of them. Rating agencies do a great amount of number crunching, but the final outcome also takes into account factors like quality of management, corporate strategy, economic outlook and international environment. To ensure consistency and reliability, a number of qualified professionals are involved in the rating process. The Rating Committee, which assigns the final rating, consists of professionals with impeccable credentials. Rating agencies also ensure that the rating process is insulated from any possible conflicts of interest.
7. Why do rating agencies monitor the issues already rated?
A rating is an opinion given on the basis of information available at a particular point of time. As time goes by, many things change, affecting the debt servicing capabilities of the issuer, one way or the other. It is, therefore, essential that as a part of their investor service, rating agencies monitor all outstanding debt issues rated by them. In the context of emerging developments, the rating agencies often put issues under credit watch and upgrade or downgrade the ratings as and when necessary. Normally, such action is taken after intensive interaction with the issuers.
8. Do issuers have a right of appeal against a rating assigned?
Yes. In a situation where an issuer is unhappy with the rating assigned, he may request for a review, furnishing additional information, if any, considered relevant. The rating agency will, then, undertake a review and thereafter indicate its final decision. Unless the rating agency had overlooked critical information at the first stage, (which is unlikely), chances of the rating being changed on appeal are rare.
9. What are the limitations of Credit Rating?
CRNL’s ratings are based on information obtained from sources believed by it to be accurate and reliable. CRNL 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. CRNL does not perform an ‘audit’ in connection with the rating exercise nor does it undertake a forensic exercise to detect fraud. On occasions, CRNL may rely on unaudited financial information.
10. How much time does the rating process take?
The rating process is a fairly detailed exercise. It involves, among other things, analysis of published financial information, visits to the issuer’s office and works, intensive discussion with the senior executives of issuer, discussions with auditors, bankers, etc. It also involves an in-depth study of the industry itself and a degree of environment scanning. All this takes time and a rating agency may take three or four weeks to arrive at a decision, subject to availability of all the solicited information. It is of paramount importance to rating companies to ensure that they do not, in any way, compromise on the quality of their analysis, under pressure from issuers for quick results. Issuers would also be well advised to approach the rating agencies sufficiently in advance so that issue schedules can be adhered to.