RATING PROCESS :
Rating process refers to the typical practices and procedures which a rating agency follows to gather information for evaluating the credit risk of specific issuers and issues, to analyze and conclude on the appropriate rating to monitor the credit quality of the rated issuer or security over time, deciding on timely changes in ratings, as and when companies’ fundamentals change and to keep investors and the market players informed. All these are interrelated and on going processes. The rating agencies in India have adopted the methodology of the major international credit rating agencies.
The rating process begins with the receipt of a mandate from the issuer company. The next step is to form analytical teams with sectoral skills.
Information gathering/analysis
For the basic research, obtain credit related data, both statistical and qualitative, from a multitude of sources like annual reports, prospectus, industry/sectoral economic data, government reports, news reports, discussions with industry/ regulatory/other circles. Statistical data bases are developed over time to enable comparability across major issuer categories.
Meetings with Management
Meetings are held with key operating personnel of the company covering broadly the background, history, organisational structure, operating performance, financial management and topics of special relevance to the company’s future. The central focus of all discussions is the same with analysts looking for information that will help them to understand the issuer’s ability to generate cash from operations to meet debt obligations over the next several years. It is the management’s opportunity to explain the company’s business and financial strategies. Finally, a meeting with top management is held, where apart from corporate strategy and philosophy, key issues relevant to the rating are discussed. A plant visit with the major manufacturing/work centres and project sites is invariably undertaken. In India, credit rating agencies do not undertake unsolicited ratings merely based on published information of the company. The quality of credit rating will greatly improve with privileged information obtained from the companies by credit rating agencies. It is possible to have two agencies to do the rating for a particular issue and the findings may even vary, because rating is a matter of perceptions. But generally the findings will not be varying widely.
The ratings can be published by the agency only after approval and with the permission of the issuer. Subsequent changes emerging out of the monitoring by the credit rating agency will be published even if such changes are not found acceptable to the issuers. The issuer may appeal on the findings of an agency. In such a case the agency will undertake a review and thereafter indicate its final decision. Unless the rating agency has over looked critical information at the first stage, chances of the rating being changed on appeal will be rare.
There is no system yet to rate the rating agency. Informed public opinion is the touch stone on which the rating companies are being assessed. The success of a rating agency is measured by the quality, consistency and integrity and the record of acceptance in the market. The rating is always about a particular issue and not generally about the issuer.