Credit Research Analysis

• Credit research analysis is tools and techniques to understand the debt paying
capabilities of any company.
• The goal of credit research analysis is to determine the creditworthiness of an issuer
and to provide insights into the likelihood of default or the ability to meet debt
obligations.
• Credit research analysts typically work in financial institutions, credit rating
agencies, or investment firms.
• It analyse various factors and information to assess the creditworthiness of an
issuer, such as financial statements, industry trends, economic indicators, and
management quality
• It also analyse external factors like macroeconomic conditions, regulatory
environment, and market sentiment.
 Credit rating

Credit rating:
A credit rating is a measurement of a person or business entity's ability to repay a
financial obligation based on income and past repayment histories.
A credit rating is, however, not an assurance or guarantee of a kind of financial
performance by a certain instrument of debt or a specific debtor. The opinions
provided by a credit agency do not replace those of a financial advisor or portfolio
manager.
• In other words, rating indicates the probability of default of the rated instrument
and therefore provides a benchmarks for measuring and pricing credit.
• Any entity that seeks to borrow money can be assigned a credit rating.
 Objectives of Credit rating

Following are the major objectives of Credit rating :

⮚ Assessing creditworthiness
⮚ Facilitating investment decisions
⮚ Assisting lenders in risk assessment
⮚ Enabling pricing of debt securities
⮚ Enhancing transparency and market efficiency
⮚ Assisting regulators and policymakers
⮚ Promoting investor confidence
 Factors affecting Credit Rating of a company

The credit rating agency take into consideration a number of factors while assigning
credit rating to a company
Some of the common factor are listed below:
a) Financial History:
b) Industry and market factors
c) Management quality
d) Country or sovereign risk
 Importance of Credit rating

• Credit rating play an important role in determining whether or not to

purchase bonds. A poor credit rating is a risky as it indicates that there is a large
probability that the company will not pay off its bond obligations
• A company which has high credit ratings can reduce its cost of raising funds from
the public.
• A company with high credit rating bond can approach the investors for resource
mobilization through press media
• A company with good credit ratings holds larger probability of raising fund from
other countries and this also attracts foreign investors to invests in such countries
encouraging Foreign Direct Investment
• A credit rating decides if the borrower should be given a loan or not and also
suggest whether it will be able to repay the loan.
 Credit Rating Agencies

A credit rating agency is a company which rates the debtors on the basis of their ability
to pay back the debt in a timely manner. They rate large-scale borrowers, whether
companies or governments.

A credit rating agency is an organization which assigns credit ratings to the debtors
predicting their capability to pay back debt timely and simultaneously making the
forecast on the chances of the debtor being default. These rating agencies rate large
borrowers (both governments and companies)
 Key functions of Credit Rating Agencies

Some of the key functions of credit rating agencies are discussed below:

Low-cost information:- The credit rating agency collects, analyses, interprets and
makes a proper conclusion of any complex data and transforms it into a very lucid and
easily understandable manner.
Provides a basis for suitable risk and return:- The instruments rated by rating
agency gets greater confidence amongst investor community. It also gives an idea
regarding the risk associated with the instrument

Helps in the formulation of Public policy:- If debt instruments are professionally

rated, it becomes very easy to judge the eligibility of various securities for inclusion in
the institutional portfolio with greater confidence
• Provides superior information:- Credit rating agency being an independent rating
agency, due to highly trained and professional staffs and with the access to
information which is not publicly available information, these agencies are able to
deliver superior information.
• Enhances corporate image:- Better credit rating for any credit investment
enhances visibility and corporate image in the industry
There are a number of credit rating agencies in India, out of which the three main rating
agencies are as follows:

1. CRISIL
2. ICRA
3. CARE
 CRISIL
• CRISIL commenced its operations in the year 1987 and it is India’s first credit
rating agency. The company conducts its operations from 8 countries including
India, US, UK, Singapore, China, Poland, Argentina and Hong Kong. However, it
has its head office in Mumbai.
• The company provides ratings, analytics, and solutions, research with a very good
track record of innovation and growth. Standard and Poor’s is the majority
shareholder of CRISIL.
 Long-Term Debt Ratings:
– CRISIL AAA: Highest degree of safety regarding timely payment of interest and
principal.
– CRISIL AA: High degree of safety, but slightly lower than AAA.
– CRISIL A: Adequate degree of safety, though more susceptible to changes in
circumstances.
– CRISIL BBB: Moderate degree of safety, but may be vulnerable to adverse changes.
– CRISIL BB: Moderate risk of default, less vulnerable in the near term.
– CRISIL B: High-risk category, prone to default, and dependent on favorable business,
financial, and economic conditions.
– CRISIL C: Very high risk of default and highly vulnerable to adverse business, financial,
and economic conditions.
– CRISIL D: Default or imminent default on financial obligations.
•
 Short-Term Debt Ratings:

• CRISIL A1: Highest degree of safety, indicating a strong capacity for timely
repayment.
• CRISIL A2: High degree of safety, but slightly lower than A1.
• CRISIL A3: Moderate degree of safety, with the capacity for timely repayment,
subject to favorable circumstances.
• CRISIL A4: Adequate degree of safety, but more susceptible to changes in
circumstances.
• CRISIL D: Default or imminent default on financial obligations.
 ICRA
• ICRA was the second rating agency established in the year 1991. It is a public
limited company and it has its head office in New Delhi.
• Moody’s is the majority shareholder of ICRA. The long-term rating of ICRA is
exactly similar to CRISIL as shown in the chart above.
• Here are the commonly used rating scales by ICRA:
 Long-Term Debt Ratings:

• ICRA AAA: Highest credit quality, indicating a strong capacity for timely payment
of interest and principal.
• ICRA AA: High credit quality, but slightly lower than AAA.
• ICRA A: Adequate credit quality, with a reasonable capacity for timely payment,
but more susceptible to changes in circumstances.
• ICRA BBB: Moderate credit quality, with the capacity for timely payment, but may
be vulnerable to adverse changes.
• ICRA BB: Moderate risk of default, less susceptible to default in the near term.
• ICRA B: High risk of default, dependent on favorable business, financial, and
economic conditions.
• ICRA C: Very high risk of default and highly vulnerable to adverse business,
financial, and economic conditions.
• ICRA D: Default or imminent default on financial obligations.
 Short-Term Debt Ratings:

• ICRA A1: Highest credit quality, indicating a strong capacity for timely repayment.
• ICRA A2: High credit quality, but slightly lower than A1.
• ICRA A3: Moderate credit quality, with the capacity for timely repayment, subject to
favorable circumstances.
• ICRA A4: Adequate credit quality, but more susceptible to changes in circumstances.
• ICRA D: Default or imminent default on financial obligations.
 CARE
• CARE Ratings Limited, commonly known as CARE, is one of the prominent credit
rating agencies in India. Founded in 1993, CARE provides credit ratings, research,
and risk advisory services to assess the creditworthiness of entities and debt
instruments
• CARE uses different rating scales for different types of securities and entities.
These scales may include symbols such as AAA, AA, A, BBB, BB, B, C, and D,
indicating the creditworthiness and the likelihood of default.
 Risk in Debt instrument

1.Credit Risk
2. Interest Rate Risk
3. Inflation Risk
4. Liquidity Risk
5. Call Risk
6. Currency Risk
7. Regulatory and Legal Risk