Executive Summary

The rating of a company is enhanced when its credit worthiness, in addition to its individual strength and weakness is also dependant on the pedigree and backing it enjoys from its stronger parentor group companies. Acuité also factors in the ease and track record of support from the parent or group for rating. In case the cash flows of the parent or group entities are ring fenced, and unavailable to the company being rated, Acuité adequately factors in the same, and may not provide any notch up.

Although several parameters to determine the extent of parent/group support available to an entity exist, Acuité recognises that in case of parent-subsidiary relationship, the support to the subsidiary will probably flow from only one strong entity. However in case of group companies, the support could flow through multiple entities in the group, and it may be difficult to ascertain the single supporting group entity. Thus, Acuité considers group support notch up only if the the group has a relatively strong credit profile.

Firstly, Acuité would arrive at the group's overall rating after aggregation of business, management and financial risks of various group companies. In case, only parent company support is forthcoming, Acuité will evaluate the credit profile of the parent entity and also factor in the likely impact of the support on the subsidiary in the parent company's credit rating. Thereafter, the ability and willingness of the parent company to provide support to the company being rated in times of distress would be evaluated. 

Acuité's analysis of group/parent support will be based on various factors including the nature of business relationship and the company being rated, quantum of shareholding by companies in the group/parent in the company being rated and the degree of management control. Based on the assessment of these factors, the level of linkage of the subsidiary being rated with the group/parent would be established. Thereafter, Acuité would suitably notch up the stand-alone rating of the company being rated. A fully-owned company with significant business synergies with the group/parent using a common brand name could get a higher notch up as compared to a company that has limited synergy in operations and limited likelihood of support. The parameters taken into consideration for such evaluation are elaborated below.

This approach will clearly identify the relationship between the individual company and the group companies/parent company and establish the extent of support likely to flow to the rated entity.

Factors to be considered while notching up of Ratings

• Nature of business relationship of the company being rated with the group/parent:

When substantial business synergies exist between the company being rated and other companies within the group/parent company or if the company is of strategic importance to the group/parent, appropriate weightage could be assigned to the relationship. 

The following are taken into consideration to determine business synergies:

• The company could be providing critical inputs to the group's/parent company's operations
• The company could be contributing significantly to the group's/parent company's turnover, profit after tax and cash flows
• The company could be in a line of business that the group/parent company believes to have considerable growth potential
• Use of common brand

The company being rated could be sharing a common brand name either in part or full with the group/parent company. In such a case the group /parent company could be under pressure to support the company in times of difficulty.

• Quantum of holding by parent/group companies

Greater the percentage of shareholding of the group /parent company in the related entity, higher is the weightage that could be assigned. Further, due consideration is also given to future plans of the group/parent company with regard to increasing its holding.

• Value of exposure of parent/group

Greater the value of exposure of group/parent company in the entity being rated as compared to size of operations of the parent/group, higher would the weightage.

• Management control

The commitment of the group/parent in managing and controlling the company being rated in both strategic direction and operations should be one of the factors to be considered. A more involved management and control by the group/parent could be viewed favourably while notching up of ratings.

• Management's written commitment and stated posture

The written assurances given by the group/parent company through letters of comfort, keep well agreements, contractual arrangements for supply of services/products could be viewed as increased commitment by the group/parent company to the company being rated. Also, in cases where the parent/group company has a clearly articulated, publicly stated intent to support, the likelihood of the same being honoured in times of financial distress is higher.

• Track record in supporting the entity being rated and ease of support

The groups'/parent company's past record of supporting the entity being rated should be an important consideration for notching up the rating of the latter. Acuité also assesses the relative ease with which the parent/group companies can transfer funds to the entity being rated. Parameters affecting the ease of support can be common lenders/bankers, domicile status, shared lines of credit and significant sale purchase transactions. 

Acuité may follow the approach of consolidation of the entities (please refer to Acuité's criteria on consolidation) in case there is reason to believe that the level of inter-linkage between the related entity and the entity being rated is of the highest order.

Factors to be considered while notching down of Rating

In specific cases of parent-subsidiary relationship, where the subsidiary's standalone credit profile is significantly stronger than the parent's, Acuité may also notch down the rating of the subsidiary (entity being rated). A stronger subsidiary could be supporting a weaker parent by ways of inter-corporate deposits (ICDs), dividends or preferential sale-purchase transactions providing preferential credit terms to the parent.