CARE Ratings

CARE Ratings – JOURNEY TOWARDS EXCELLENCE
1
Significance of Credit Rating
for Funding Options

Presentation Structure
• Funding Options
• What is Credit Rating & its process
• Credit Rating Services for Enterprises
• Benefits of Rating Services
• About & Why CARE Ratings
CARE Ratings – JOURNEY TOWARDS EXCELLENCE 3

Funding Options
Equity
Own Resources (Friends, relatives etc.)
Venture Capital (VC) /Private Equity
Initial Public Offer (IPO)/Private Placements
Debt
Institutional Finance
• Bank term loans and working capital facilities
• Loans from financial institutions
Capital Market Instruments
• Bonds / Debentures / Structured Products
• Commercial paper (CP)
Fixed Deposit (FD)

What does investor looks for
Safety of Investment
Return on Investment

How do you convince investor?
OPTION I - You do the talking….
Is it very effective?? May be yes or no…
OPTION II – Let others talk about you:
Much more effective
Need for Third Party Assessment

What is Credit Rating & its process

Concept of credit ratings
“Credit rating is, essentially, an

independent, unbiased and objective
opinion on the relative ability and
willingness of the issuer of a debt
instrument to meet the debt service
obligations as and when they arise.”

Rating Scale
Investment Grade Speculative Grade
AAA BB
AA B
Long
Term A C
BBB D
PR1+
PR1 PR4
Short
Term PR2 PR5
PR3

Key Parameter Evaluated
Industry Risk
Business Risk
Management Evaluation
Financial Risk
Project Risk

Industry Risk
Regulatory Environment Demand-Supply Gap Cyclicality / Seasonality

• Govt. Policy • Trend Analysis – • Sensitivity to economic cycle
Stable/Growing/Declining
• Govt. Priority Level • Rating “Through the Cycle”
• Market Size
• International Competition / • Product Life Cycle
Restrictions • Investment plans of
existing/new players
• Role of Regulators E.g. ERC,
TRAI etc.
Input Related Risk Industry Financials Industry Competition

• Availability • Aggregate Industry Financials • No. of players, entry barriers,
input related risk, bargaining
• Price Volatility • Aggregate Industry Ratios
power of suppliers / buyers,
substitute products etc.

Business Risk
Location Product/Business Mix
Availability of Utilities Mkt. & Distribution
Availability of Raw R&D Edge
Materials
Manpower
Cost Structure
Capacity Utilization Environmental Regulations
Level of Integration Size of the Company
Technology

Management Evaluation
Industry Experience Support from / Propensity
to support Group
Composition of Board
Companies
Risk Management Approach
Integrity / Ethics
Debt Servicing Track Record
Management Succession
Management Proactiveness
Labour Relations
Past Successful strategies
Policies & Processes
Ability to meet projections

Financial Risk
Financial Risk
Past Financials Projected Financials

Growth in Revenues Growth Assumptions
Profitability Cash Flow Adequacy
Solvency DSCR
Liquidity Financial Flexibility
Quality of Accounts

Project Risk
Project Risk
Project Rationale – Expansion, Integration, Diversification
Financial Flexibility
Resource Mobilisation
Necessary Approvals & Clearances
Size of the Project
Management’s Experience in Project Implementation
Project Viability
Post Implementation Risk – Financial Risk & Business Risk

In nutshell
Credit Risk
Industry Risk Business Risk Mgmt. Evaln. Financial Risk
Industry Market Position Track Record Existing Fin. Position

Characteristics
Industry Financials Operating Efficiency Credibility Cash flow adequacy
Strategic initiatives Financial Flexibility
Others Accounting Quality
External Risk Internal Risk
For Companies with Capex, Project Risk is also considered

Rating/Grading Services
Banks and FI
IPO Grading & ratings
SME/SSI
Equi-Grade
ratings
Structured
Corporate
Finance
ratings
Ratings
Sub-
Infrastructure
sovereign
ratings
ratings
Services
Corporate
Issuer
Governance
Rating
ratings
Insurance/ Construction
CPA ratings Grading
Fund credit
Grading of
Quality
MTI
rating

Rating/Grading Services For Enterprises

Bank Facility Rating under Basel-II
framework
Banks are required to arrive at their capital requirements
for loan/facility exposures to various entities using
stipulated risk weights.
These risk weights are linked to the credit ratings of

loans/facility assigned by RBI/SEBI recognized rating
agencies such as CARE.
An unrated loan/facility exposure by the Bank gets a

higher risk weight whereas a rated exposure gets lower
risk rate.
Credit Risk & Ratings
Mapping of Rating & Risk Weights (Corporates)

Long Term
CARE AAA AA A BBB

RW (%) 20 30 50 100
Short Term
CARE PR1+ PR1 PR2 PR3
RW (%) 20 30 50 100

Credit Risk & Ratings
Unrated fresh sanction/renewals attract higher risk weight
> `50cr exposure (aggregate basis) by Apr’08
> `10cr
10cr exposure (aggregate basis) by Apr’09

Implications
Banks are likely to price their exposures on the basis of rating.
Better rated borrowers can get credit facilities at lower rate of interest on
account of lower capital requirement of banks.
An illustration
For every `100/- lent to a AAA rated borrower, bank will have to keep aside
capital of `1.80 whereas for unrated borrower, it will need capital of `13.50.

Debt Instruments
Rating of all types of medium and long term debt
securities
Long tern instruments such as debentures, bonds

and convertible bonds.
Short term debt obligation such as Commercial

Paper, Inter-corporate deposits, fixed deposits and
certificates of deposits.

SME Rating/NSIC – CARE SSI
Rating
An issue specific, one-time assessment of the credit risk of entity
Comparison with credit risk of other SMEs.
Considers credit risk over one year horizon,
Reflects the overall debt-management capability.
NSIC- CARE SSI Rating subsidised rating fee
Turnover (` Lakh)
Particulars < 50 50-200 >200
Rating Fees (`) 27,000 35,000 47,000
Service Tax @ 10.3 % (`) 2,781 3,605 4,841
Total Fees (`) 29,781 38,605 51,841
Subsidy from NSIC (`) 22,336 28,954 38,881
Amount payable by SSI (`) 7,445 9,651 12,960

Credit Rating Process
CLIENT CARE
Request for Rating Assigns rating team
Submits information and

detailed schedules The team analyses the information
Interacts with team, responds to

queries and provides additional Team interacts with client, undertakes site
data necessary for the analysis. visits and analyses data submitted by client
RATING COMMITTEE awards rating.

Rating Letter & rationale issued to client
Accepts Yes
Press Release, published in website,
Rating?
CAREVIEW and Rating Reckoner
No Rating Kept Under Periodic Surveillance
Appeal for Review of

rating
(once)

Benefits of Credit Rating
For Investors & Banks
An independent, unbiased and objective opinion on risk
To assess the risk premium
To effectively monitor and manage investments
For Regulators…
To monitor financial soundness of organisations
Promote transparency in the debt market

Benefits of Credit Rating
For Enterprises
An independent third-party evaluation
Wide access to funds
For pricing and timing of issues correctly
Scope of self correction & self improvement

For Business counterparties
For establishing business relationships
For opening letters of credit, awarding contracts
For entering into collaboration agreements

What is IPO Grading
• An independent and professional assessment of

equity issues offered to public
• An opinion on the “fundamentals” of the issuer
• Relative assessment of the issue in relation to the

universe of other listed peers

Grading Methodology
•Industry dynamics, growth prospects, environment
Business fundamentals •Market position; competitive advantages; product mix
•Technology; operating efficiencies; cost structure
Promoter/management •Experience/background of promoters

•Management competence; functional allocation
evaluation
•Clarity of business strategy
•Trends in margins and profitability

Financial analysis •Financial flexibility and liquidity
•Financial projections

Grading Methodology
•Transparency; adequacy of disclosures

Accounting policies •Changes in accounting policy
•Auditors’ comments in annual reports
•Project completion risk – time and cost overruns

Project risk •Status of financial closure
•Required approvals for project
Corporate governance •Separation of ownership and management

•Size, composition and independence of board
practices
•Regulatory compliance

IPO Grading Scale
Grading Definition
IPO Grade 5 Strong fundamentals.
IPO Grade 4 Good fundamentals.
IPO Grade 3 Average fundamentals.
IPO Grade 2 Below Average fundamentals.
IPO Grade 1 Poor fundamentals.

CARE EQUI-GRADE
• The critical factors considered by an investor while investing in a particular company’s
equity share are:
Whether the company is fundamentally sound with respect to its business, its
FUNDAMENTALS
financial position, its management and its prospects
What return can the investment potentially offer, which in turn is based on the
RETURN
LIQUIDITY Current Intrinsic Value (CIV) of the stock vis-a-vis its Current Market Price (CMP)
• CARE Independent Equity Research Product to be christened as ‘CARE Equi-Grade’

• CARE Equi-Grade shall touch upon all the three key parameters considered by the
investor before making any investment decision

PARAMETERS CONSIDERED
FUNDAMENTALS STOCK LIQUIDITY
Business Fundamentals CARE to choose apt

and Prospects valuation methodology
DCF, P/E, P/BV,

Financial Soundness EV/EBITDA, NAV,
Replacement Cost, etc.
Independent Financial
Management Quality
Projections
Current Intrinsic Value v/s

Corporate Governance Current Market Price
(Return Potential)

BENEFITS TO THE COMPANY
• With unbiased opinion available, the investor confidence in the company
increases.
• This leads to increase in trading volumes on the stock exchange
• Companies can easily raise funds from the market, both equity as well as
debt, as CARE IER provides grading on both fundamentals of the company
and valuation of its equity.
• Ease in raising long term debt based on Fundamental Grade

• Ease in private placement of company’s equity based on Valuation
Grade
• Ease in raising equity through follow-on public offers, right issues, etc.

About CARE Ratings

Second Largest Rating Agency in India

Major Shareholders
IDBI Bank
Canara First
Bank Leasing
State
Tata
Bank of
Group
India
CARE
IL&FS Sundaram
Group Finance
ING Vysya Federal

Bank Bank

An Independent External Rating Committee
Mr. Y. H. Malegam Chairman
Former Managing Partner, S.B. Billimoria & Co.; Member of Board of
Directors of a number of companies and organizations including Reserve
Bank of India
Mr. S. Doreswamy Former CMD, Central Bank of India and Dena Bank
Mr. V. Leeladhar Former Dy. Governor, Reserve Bank of India.
Mr. V.K. Chopra Former Wholetime Member of Securities & Exchange Board of India and
Chairman and Managing Director of Corporation Bank.
Mr.P.P.Pattanayak Former Managing Director of State Bank of Mysore.

Former Dy. Managing Director & Chief Credit Officer of State Bank of
India
Mr. D. R. Dogra MD & CEO

38
Leadership Position in
Indian Banks / FIs Ratings
Rating of 51 Indian Banks & FIs

Substantial rating coverage of NBFCs &
HFCs
Rating diverse financial entities

39
Leadership in Various Sectors
Construction & Real Estate

Power Transmission
Shipping & Shipyards
Hospitality Sector
Steel & Steel Products
Telecom
Textiles
Cement

40
Sub Sovereign Ratings
All rated Indian

states have a
CARE rating

41
IPO Grading
Achieved Market Leadership in IPO grading
43% Market Share
82 IPOs Graded

42
Structured Finance
Leadership in ABS & MBS rating
More than 40% market share in current financial year
More than ` 9,000 crore of pools rated in FY’10
Highly stable ratings (no downgrades or defaults till
date)
Largest securitization in Asia(Japan) and Largest
Single CLO rated

43
International Footprint
Technical assistance to Rating Agencies in

Mexico
Ecuador
Bangladesh
Nepal
Assignments for ADB
Founder member of Association of Credit Rating

Agencies in Asia (ACRAA)

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Why CARE?
Impressive Track Record of more than 17 years

Approved by RBI/ SEBI / Other Regulators
Empanelment with NSIC for SSI Ratings
Best practices IOSCO Code of Conduct
Comparable Transition Matrix / CDR
Independent Rating Committee

45
Why CARE?
Ratings widely accepted by market participants
Capability
Highest number of ratings in shortest span of

time
Capable team of more than 200 analysts &

growing

46
Marketing Associate
Incentive driven partnering options for CAs & CSs

for origination of rating business

Thank You

CARE Ratings

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CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

• What is Credit Rating & its process

• Credit Rating Services for Enterprises

• Benefits of Rating Services

• About & Why CARE Ratings

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 3

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

OPTION I - You do the talking….

Is it very effective?? May be yes or no…

OPTION II – Let others talk about you:

Much more effective

Need for Third Party Assessment

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

“Credit rating is, essentially, an

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 10

Regulatory Environment Demand-Supply Gap Cyclicality / Seasonality

Input Related Risk Industry Financials Industry Competition

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Level of Integration Size of the Company

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Past Financials Projected Financials

Profitability Cash Flow Adequacy

Liquidity Financial Flexibility

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Necessary Approvals & Clearances

Size of the Project

Management’s Experience in Project Implementation

Post Implementation Risk – Financial Risk & Business Risk

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Industry Risk Business Risk Mgmt. Evaln. Financial Risk

Industry Market Position Track Record Existing Fin. Position

Industry Financials Operating Efficiency Credibility Cash flow adequacy

Strategic initiatives Financial Flexibility

Others Accounting Quality

External Risk Internal Risk

For Companies with Capex, Project Risk is also considered

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 17

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 18

These risk weights are linked to the credit ratings of

An unrated loan/facility exposure by the Bank gets a

Mapping of Rating & Risk Weights (Corporates)

CARE AAA AA A BBB

CARE PR1+ PR1 PR2 PR3

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Unrated fresh sanction/renewals attract higher risk weight

> `50cr exposure (aggregate basis) by Apr’08

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Banks are likely to price their exposures on the basis of rating.

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Long tern instruments such as debentures, bonds

Short term debt obligation such as Commercial

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 23

CARE Ratings – JOURNEY TOWARDS EXCELLENCE 24

Request for Rating Assigns rating team

Submits information and

Interacts with team, responds to