Credit Rating

CREDIT RATING
1.
What is credit rating?
A credit rating is an opinion regarding timely payment of interest and principal on a debt instrument. A simple alphanumeric symbol is normally used to convey a credit rating. 2. Is a credit rating in the nature of a recommendation?
No, a credit rating is not a recommendation to buy, sell or hold a debt instrument. It is a comment only on the credit risk in an 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. 3. How is credit rating done?
Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company along with an in-depth study of the industry as well as macro-economic, regulatory and political environment. 4. What do the various rating symbols mean? Each rating symbol is an alphanumeric representation of the degree of repayment risk associated with debt instruments. 5. Are rating symbols the same across all types of debt instruments?
No. Rating symbols may vary depending on the type of debt instrument, as for example long term or short term. 6. What do the + and -sign indicate in a rating?
Plus and minus symbols are used to indicate 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+. 7. What are investment and speculative grade ratings?
An investment grade rating signifies the rating agencys belief that the rated instrument is likely to meet its payment obligations. The debt instruments rated 'BBB' and above are classified as investment grade ratings. Instruments that are rated BB and below are classified as 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 a higher probability of default compared to instruments rated in the investment grade. 8. Who pays for the credit rating?
The issuer pays for the credit rating. 9. Who regulates rating agencies?
In India, credit rating agencies are regulated by SEBI. The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for their registration, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest, code of conduct and inspection of rating agencies by SEBI, among other things. 10. 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 opinion of the rating agency. 11. 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 carry out periodic reviews of all published ratings and disclose the revised ratings. 12. Why do ratings change? Rating is an opinion based on information available at a point in time with the rating agency. However, information can change significantly over time causing the rated agencies performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be altered. 13. What does a rating downgrade indicate? As mentioned earlier, rating is monitored throughout the life of the instrument. A downgrade in the rating indicates that the risk of the instrument is higher than what was earlier predicted. 14. 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. There is no contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency. It is advisable that the investor should also do his own risk analysis apart from relying on ratings while making investments.
Rating of Capital Protection-Oriented Funds (CPFs) 15. What is rating of CPFs? The ratings on CPFs indicate the degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme. It is a comment on the portfolios ability to protect its capital. 16. Why is rating of CPFs necessary? An investor in a CPF may either have limited access to information on it, or may find it challenging to appropriately assess, on the basis of the information available, the ability of the portfolio to protect its capital. Rating 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. 17. Does the rating comment on the NAV of the fund? No. The rating does not comment on the schemes Net Asset Value (NAV). 18. Is rating of CPFs mandatory? Yes. As per applicable SEBI Regulations, a pre-condition to the launch of CPFs by Asset Management Companies is that the scheme be rated by a registered credit rating agency from the perspective of the portfolios ability to protect the capital invested therein. 19. For how long would the assigned rating be valid? To protect the interest of investors in CPFs, SEBI has mandated that the rating must be reviewed on a quarterly basis. 20. Which are the credit rating agencies registered with SEBI? Name of the rating agency Credit Analysis & Research Ltd. (CARE) Information 4th Floor, Godrej Coliseum Somaiya Hospital Road Off Eastern Express Highway Sion (East) Mumbai-400022 http://www.careratings.com 1105, Kailash Building, 11th Floor 26, Kasturba Gandhi Marg New Delhi-110 001 http://www.icra.in CRISIL House
ICRA Ltd.
CRISIL Ltd.
Central Avenue Hiranandani Business Park Powai Mumbai 400 076 http://www.crisil.com Fitch Ratings India Pvt.Ltd. Apeejay House, 6th Floor 3, Dinshaw Vachha Road Churchgate Mumbai-400020 http://www.fitchindia.com 55, 1st Main, 3rd Phase J P Nagar Bangalore 560078 http://www.brickworkratings.in
Brickwork Ratings India Pvt.Ltd.

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CREDIT RATING

What is credit rating?

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