Frequently Asked Questions (FAQs) on Ratings

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 per the terms of the issue.

Why symbols are used to convey the rating?

The symbols used in the ratings are easy to understand and has been standardised across the Credit Rating Agencies (CRAs). CRAs publish the definitions for the symbols used and also the rationale for the ratings assigned by them to facilitate greater understanding.

How the Credit Ratings are arrived at?

Infomerics Ratings are based on an in-depth study of the industry as also an evaluation of the strengths and weaknesses of the company. The rating process involves, among other things, analysis of published financial information, visit to the issuer’s office and works, intensive discussion with the senior management of the issuer, discussion with auditors, bankers, etc. It is of paramount importance to rating companies to ensure that there is no compromise on the quality of their analysis.

How credibility of a rating is maintained?

Infomerics Ratings maintains absolute independence from market participants to provide unbiased opinions. The ratings are a result of collective judgement of committee members. The External Rating Committee constituted by Infomerics Ratings, which assigns the final rating, consists of professionals with impeccable credentials. It is also ensured that the rating process is insulated from any possible conflicts of interest.

How long does a Rating remain valid?

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/facilities rated by them. The rating is monitored by Infomerics Ratings throughout the life of the instrument. The process is known as surveillance. During the surveillance period, all changes affecting the issuer company are taken into account and the rating, if necessary, is revised, upwards or downwards. So effectively, a rating is valid during the life of the instrument unless it is revised.What does the suffix + or – with the Rating mean?The modifiers + (plus) or – (minus) may be used with the rating symbols for the categories AA to C. The modifiers reflect the comparative standing within the category.

What is Rating outlook?

Ratings outlook serves the useful purpose of indicating the direction in which a medium term/long term rating may move over the next 6-18 months. Outlooks can be positive, stable or negative depending on whether the rating may be upgraded, unchanged, or downgraded. It is used to communicate the rating trend to the investor and avoid abrupt change, unless circumstances so justify. It also serves as a tool to differentiate among similarly rated instruments across the rating spectrum.

Is the rating assigned for an instrument or for the issuer company?

Rating of instruments would factor instruments’ specific characteristics like maturity, credit enhancements specific to the issue etc. Issuer ratings consider the overall debt management capability of an issuer on a medium-term perspective, typically three to five years. While issuer ratings are more often than not, one time assessments of credit quality, instrument ratings are monitored over the life of the instrument.

How does a Rating help an Investor?

The rating provides the investors with an independent professional judgement of the credit quality of the instrument after making a detailed study of all relevant factors, which the individual investor would not otherwise be able to evaluate. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors.

How does a Rating help an Issuer?

The issuers of rated securities are expected to have an access to a wider investor base. This is based on the fact that largely investors are using rating as a tool for decision making and there is faith placed by the market on opinions of rating agencies. Credit rating provides a basis for determining the returns compared to the risks involved or perceived.

Why Rating is necessary for Bank Loans?

Credit ratings are used for determination of risk weights for calculation of Capital Adequacy for Banks as per Basel II guidelines in India. In general, credit rating is expected to bridge information asymmetry in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it.

Do issuers have a right to appeal against a rating assigned?

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, chances of the rating being changed on appeal are rare.

What Ratings do not convey?

Credit Ratings are opinion only and not recommendations to buy or sell or hold a specified rated security nor are they offered as guarantees or protections against default. The factors which are of significance to an investor in arriving at investment decisions 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.A credit rating is not a guarantee against future losses. A credit rating is a professional opinion given after studying all available information at a particular point of time. Such opinions may prove wrong in the context of subsequent events.

What is unsolicited Ratings?

Unsolicited ratings are those ratings which have not been mandated by the issuer and there is no participation of the issuer in the rating process. So any rating based entirely on published information has serious limitations and the success of a rating agency will depend, to a great extent, on its ability to access privileged information. Co-operation from the issuers as well as their willingness to share confidential information are important pre-requisites.

What are the limitations of Infomerics Ratings?

Infomerics ratings are only an opinion on the relative ranking of credit risk. Even the debt obligations rated in the highest category carry a certain degree of credit risk, although such risk would be the lowest when compared with the credit risks associated with obligations rated in the lower rating categories.

Infomerics ratings are not always constant and are subject to change. The ratings reflect the issuers’ inherent credit quality, which in many cases may not remain constant at all times. Though the analysis does factor the issuers’ prospective credit quality, there may be situations in which the actual developments would significantly differ from the expectations. Such changes in turn may warrant an upward or downward revision in the ratings previously assigned.