The agency commences a rating exercise only at the request of a company. It employs a multi layered decision-making process in assigning ratings. The following steps are taken for rating the issuer’s instruments for the first time before going public.
1. Initial Contact and Rating Agreement
The process of rating starts with the issuer or its representative contacting the principal officer of the agency in person or through the rating request letter by the issuer. Such a request shows the issuer intention to obtain rating for a particular debt obligation to be issued by it for raising funds from the public. After this, a rating agreement is entered into between the issuer and the agency.
2. Assignment of the Analytical Team
The agency assigns an analytical team comprising of at least two analysts of whom one would be the lead analyst and would serve as the issuer’s primary contact. The analysts who have expertise in relevant business area will be responsible for carrying out the rating assignment. The analytical team obtains and analyses information relating to the issuer’s financial statements, cash flow projections and other relevant information.
3. Management Meetings
The analytical team then proceeds to have detailed meetings with the company’s management. The agency strongly believes that interest of investors are best served if a direct dialogue is maintained with the issuer, as this enables the agency to incorporate non-public information in a rating decision and also enables the rating to be forward looking. For proper discussions with the management, the company should provide various documents such as:
1. Two copies of annual reports for past 5 years;
2. Two copies of latest prospectus;
3. Consolidated financial statements for the past 3 fiscal years by principal, subsidiary or division;
4. Two copies of statements of projected sources and application of funds, and operating statements for at least next 3 years along with assumptions on which projections have been based;
5. A copy of existing loan agreement along with recent compliance letter, if any;
6. A certified copy of the resolution adopted by the Board of Directors of the company authorizing the issuance of debt instruments;
7. Biographical information on the company’s principal officers and the name of the Board members.
Besides, these documents the agency may ask for other information also required by it for proper rating. Thus, topics discussed during the management meeting are wide ranging including competitive position, strategies, financial policies, historical performance and near and long-term financial and business outlook. Equal importance is placed on discussing the issuer’s business risk profile and strategies, in addition to reviewing financial data. The rating process ensures complete confidentiality of the information provided by the company. All information is kept strictly confidential and is not used for any other purpose, or by any third party other than the agency.
4. Analysts Report
After meeting with management, analytical team carries out the detailed analysis of the above information and review additional material, if any received from the issuer. The analysts then present their report to a Rating Committee, which then decides on the rating.
5. Rating Committee
The rating committee is formed to decide the rating. These committees vary widely in size and duration depending on the nature of each rating problem. The rating committee meeting is the only aspect of the process in which the issuer does not participate directly. The rating is arrived at after a composite assessment of all the factors concerning the issuer, with the key issues getting greater attention from the rating committee.
6. Communication to the Issuer
After the committee has assigned the rating, the rating decision is communicated to the issuer along with the reasons or rationale supporting the rating.
The agency is always willing to discuss with the management the critical analytical factors that the committee focused on while determining the rating and also any factors that the company feels may not have been considered while assigning the rating.
7. Appeal
In the event, that the issuers disagrees with the rating outcome, they may appeal the decision for which new/additional information which is material to the appeal and specifically addresses the concern expressed in the rating rationale, need to be submitted to the analyst. Subsequently, a note is put up once again before the rating committee where the rating may or may not undergo a change.
8. Dissemination to the Public
Once the rating is given, it is disseminated by the rating agency to the public along with the rationale through print media and websites of the agencies. As per the SEBI (Credit Rating Agencies) Regulations 1999, the issuer has to disclose, in the offer document:(i) the rating assigned to the issuer’s listed securities by any credit rating agency during the last three years and (ii) any rating given in respect of the issuer’s securities by any other credit rating agency, which has not been accepted by the client.
9. Surveillance and annual review
After a rating has been assigned, the agency is required to monitor the rating over the life of the debt instrument. The agency keeps the rating under continuous surveillance, monitoring both the on-going performance of the issuer’s and the economic environment in which it operates.
The agency typically conducts a formal annual review of the rating, which involves a meeting with the issuer. These review meetings focus on developments over the period since the last meeting and outlook for the coming year, enabling analysts to stay abreast of current developments, discuss potential problem areas, and the appraised of any changes in issuer’s plan.
Following a full review, the rating may either be affirmed or changed and any change effected is made public by the agency. In some instances, a credit rating may be placed on “RATING WATCH/CREDIT WATCH”. A rating watch listing highlights an emerging situation, which may materially affect the profile of a rated entity and can be designated with positive, developing or negative implications. The announcements of a merger or acquisition or the occurrence of an event that could result in a substantial change in the issuing entity’s risk profile are some of the instances where an entity’s rating may be placed on rating watch. The rating process, from the initial management meeting to the assignment of the rating, normally takes three to four weeks.
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