Frequently Asked Questions: Credit Rating

A credit rating is an independent, unbiased and objective opinion on future debt repayment ability and willingness of a borrower with respect to a debt instrument. In other words, a credit rating is a measure of risk of default in making timely repayment of principal and interest by a borrower for a particular debt instrument.

Once the rating is accepted, it would be under surveillance over the tenure of the instrument. The rating is kept updated as required, through the surveillance process. Such ratings will be made public through Acuité’s website www.acuite.in If the rating is available on the website it means that the rating is valid until it is changed.

Structured Obligations (SO) ratings are ratings assigned to instruments that involve some mechanism for credit enhancement and /or structured payment mechanism to support the debt obligations of the issuer. Such ratings carry the suffix "SO”.

A credit rating provides the investor with an independent and unbiased opinion and understanding of the credit risk in a particular debt instrument or a bank loan. Understanding credit risk is important for the investor to take an informed decision before investment/lending and to determine the ‘pricing’ of such instruments. A credit rating helps eliminate information asymmetry thus helping market forces function more efficiently.

Yes, Acuité is registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Credit Rating Agencies) Regulations, 1999 and has received SEBI’s permanent registration (IN/CRA/006/2011), to rate the debt instruments such as debentures/bonds/commercial papers, and accredited by Reserve Bank of India (RBI) as an External Credit Assessment Institution (ECAI) to undertake bank loan ratings for BASEL II requirements.

Acuité, upon receiving a request to rate an issue, charges Initial Rating Fee for carrying out the rating exercise for the first time. In subsequent years Acuité charges Annual Surveillance Fee. The Initial Rating Fee and the Annual Surveillance Fee amount is linked to the quantum of the debt instrument/Bank Loan and is usually calculated in basis points.

The fees are paid by the issuer/borrower. This model of rating is known as ‘issuer paid’ or ‘issuer solicited’ rating.

Yes, it is mandatory to sign a rating agreement.

The rating is meant to remove information asymmetry in a debt transaction. Hence, two critical conditions need to be fulfilled for a credit rating opinion to serve its purpose:

  • The rating has to be based on much more information than that is available in public domain. Access to confidential information such as company’s management, future business plans, borrowing plans, debt repayment track record, list of suppliers and customers etc. are extremely crucial for arriving at a fair rating. This is not possible if the issuing/borrowing entity doesn’t solicit the rating and signs an agreement to this effect.
  • The rating has to be made freely available in public domain so that current and future investors/lenders can readily access such information. The issuer pays for the services so that the rating and its rationale can be made available in public domain Hence the issuer paid/solicited model of rating is a more commonly accepted standard.

 

Acuité manages the actual /potential conflicts of interests in line with the SEBI regulations / guidelines and the IOSCO Code of Conduct. The above guidelines are aimed to ensure that the analytical team is able to arrive at a rating opinion without being influenced by the fee. The measures adopted by Acuité in this regard, inter alia, include:

  • The compensation of the members of analytical team at Acuité is not linked to the rating fee or the rating assigned.
  • The analytical team is firewalled and, therefore, does not have access to fee details of clients nor do they engage in fee negotiations with the client.
  • No one outside the analytical team has access to the rating assigned to an entity unless it is made public.
  • Acuité does not provide any advance indication about the rating to a client, before all information is received and analysed, and the rating is assigned by the Rating Committee.
  • Acuité employees are prohibited to trade in stocks/bonds/debentures of companies rated by Acuité. Strict disclosures of investment holdings and prior approval of sell/purchase of stocks/bonds/debentures is in place.
  • Employees of Acuité are strictly prohibited from accepting any gift, favour (in cash or kind).
  • Rating is assigned by a rating committee after necessary deliberations on the basis of voting and majority opinion, and only then the Rating is assigned. The Rating is not assigned by any individual.
  • Sales and other employees outside the analytical team don’t have access to the Rating Committees.
  • The core analytical activities are conducted within Acuité and not outsourced.
  • The rating process cannot be conducted arbitrarily and the rating process follows rating criteria / methodology. All rating criteria / methodology are publicly available on Acuité website.
  • The Rating assigned and the rationale behind the rating are also made public through the rating releases on Acuité website.

 

No, a credit rating is not a recommendation to buy, sell or hold a rated debt instrument.

No, Acuité does not conduct any audit of a rated entity. Acuité’s ratings are based on the audited/unaudited financials and other information / documents provided by the rated entity to Acuité and the information available in the public domain for assigning a rating.

No, a rating of a debt instrument is not a one-time exercise. Once an assigned rating is accepted by the client the Rating is kept under surveillance for the lifetime of the debt instrument.

The following information, inter alia, is required for a rating:

  • Annual Reports for the last three years
  • Financial projections for the next two years with relevant assumptions and Year to Date financials of the current financial year
  • Details of the Bank Facility/ies to be rated along with photocopies of all sanction letter/s
  • Timely Debt Repayment Letter (in the prescribed format) and details of any past default / delay in meeting the debt obligations
  • Top customers/suppliers details

Besides the above mentioned documents, the Organization also has to furnish to Acuité any other relevant additional information (including, but not limited to, access to operating systems/ sites, facilities and key management personnel) as may be considered necessary by Acuité for carrying out the rating assignment.

The Organization shall also require to promptly inform Acuité, in writing of any other developments such as all corporate actions including but not limited to sell-off, acquisitions and mergers, restructuring or any proposal for re-schedulements or postponement of the repayment programs of the Organization’s dues / debts with any lender (s) / investor(s).

No. At Acuité, we follow a strict policy of not providing any advance indication of a rating or even a band of ratings. This is because it is not possible to arrive at a rating without completing the entire rating exercise step by step as per Acuité’s policy and criteria.

Acuité discloses all its rating and its rating actions through its rating releases on its website www.acuite.in.

Acuité conduct surveillance and reviews for all accepted Acuité ratings of bonds/debentures/ CPs/ bank facilities/ FDs that are outstanding. This process involves tracking of developments in the business environment of the rated entities and an analysis of the audited annual and unaudited quarterly/half yearly results. The above factors are considered through a process of rating review based on which a rating committee affirms the existing rating or if necessary assigns a new rating, i.e. higher or lower, as the case may be.

During the initial rating process, once a rating is assigned and if the client, based on materially new information, is of the opinion that the rating can be better, the client can appeal for reconsideration of the rating by submitting such materially new information to Acuité. Such an Appeal can be made only once and within 05 days of communicating the rating assigned to the client.

A Rating Watch indicates that a particular rating may undergo a revision in the near term and the likely direction of such revision. A "Positive” Rating Watch indicates a possibility of an upgrade, a "Negative" Rating Watch, indicates a possibility of a downgrade. In case the impact of development or the development itself is uncertain then the Rating Watch advisory will mention "Developing". This implies that the ratings may be upgraded or downgraded. However, a Rating Watch does not necessarily mean a rating revision will have to take place.

A Rating Outlook indicates the possible direction of change of a rating and is applicable to Long-term ratings. The rating outlook is communicated along with the rating symbols, "Positive" - for a possible upward revision, "Negative" - for a possible downward revision and "Stable" - for ratings that are expected to remain unchanged. However, a "Positive" or "Negative" Rating Outlook may not necessarily lead to an actual revision in rating. Conversely, a rating may be revised upward or downward, despite having a "Stable" outlook, if circumstances so warrant.

Though there is no such formal category of investment grade / speculative grade, the investment community use these categorizations. Debt Instruments rated 'BBB-' and above are generally called investment grade. Instruments that are rated ‘BB+‘and below are known as speculative grade. 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.

No. A credit rating is an opinion of a credit rating agency. An investor is expected to conduct his /her own due diligence before investing in an instrument.

In India, Credit Ratings Agencies are registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Credit Rating Agencies) Regulations, 1999 for rating of securities offered by way of a public or rights issue. A few of SEBI registered agencies are also accredited by the Reserve Bank of India for providing bank loan rating services to meet the requirements of New Capital Adequacy Framework (Basel II norms) of RBI.

In Acuité there are strict firewalls between the Business Development Team which finalizes the fee and the Rating Operations Team which assigns the rating. In Acuité, a rating is never linked to the fee charged to a client.

Acuité does not suspend any ratings with effect from January 01, 2017 in compliance with prevailing SEBI guidelines for Credit Rating Agencies.

No, an issuer cannot request for a suspension as the rating agreement signed by the issuer does not have any such provision.

When a debt instrument is fully repaid on schedule or before schedule, the rating will be withdrawn after following the laid down process.

This will be a violation of the rating agreement between the rating agency and the issuer, and the existing SEBI regulations. Such ratings will be carried out based on publicly available information on a best effort basis. In such cases, a Press Release shall be made to this effect and the suffix "Issuer not cooperating*” shall be added to the rating symbol. The asterisk mark shall be explained as "Issuer did not co-operate; Based on best available information”.

Once all information as per the requirement is received, the rating process is completed by Acuité in about 3 - 4 weeks.

No, Acuité will not provide any advice on a better rating or a better structure of an instrument. Acuité strictly follows the SEBI (CRA) Regulations and also IOSCO Code.

A default is an instance of failure of the borrower to repay the principal and / or pay the interest in full and on the due date as per the terms of the issue/ debt. Thus, even a one-day delay and/or one-rupee shortfall in meeting the debt obligation will lead to assignment of (or a downgrade to) "D” rating signifying default.

A "D” rating may be revised to a higher (non-D) rating category after the borrower exhibits timely repayment of principal and/or payment of interest for three consecutive months and displays its commitment to continue to meet all future debt obligations in a timely manner. However, even in such cases the rating cannot be upgraded to ‘BBB-‘ or above category unless a minimum of one year’s conduct of timely debt repayment is established.

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Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.


Sankar Chakraborti
CEO