MASTER OF BUSINESS ADMINISTRATION

(INTERNATIONAL BUSINESS)
M.B.A. (I.B)

Assignment

Overseas Project Management

Submitted to: - SUBMITTED BY:-

Ms. Nidhi Kshirsagar KASHISH KASHYAP

MBA (IB) 4th SEM

Roll no: - 18218
 International Credit Rating

What Is a Credit Rating?

A credit rating is a quantified assessment of the creditworthiness of a borrower in

general terms or with respect to a particular debt or financial obligation. A credit
rating can be assigned to any entity that seeks to borrow money—an individual,
corporation, state or provincial authority, or sovereign government.

Individual credit is scored from by credit bureaus such as Experian and Transunion
on a 3-digit numerical scale using a form of Fair Isaac (FICO) credit scoring.
Credit assessment and evaluation for companies and governments is generally
done by a credit rating agency such as Standard & Poor’s (S&P), Moody’s, or
Fitch. These rating agencies are paid by the entity that is seeking a credit rating for
itself or for one of its debt issues.

How Credit Rating Works

A loan is a debt—essentially a promise, often contractual, and a credit rating

determines the likelihood that the borrower will be able and willing to pay back a
loan within the confines of the loan agreement, without defaulting. A high credit
rating indicates a high possibility of paying back the loan in its entirety without
any issues; a poor credit rating suggests that the borrower has had trouble paying
back loans in the past and might follow the same pattern in the future. The credit
rating affects the entity's chances of being approved for a given loan or receiving
favorable terms for said loan.

Credit ratings apply to businesses and government, while credit scores apply only

to individuals. Credit scores are derived from the credit history maintained by
credit-reporting agencies such as Equifax, Experian, and Transunion. An
individual's credit score is reported as a number, generally ranging from 300 to
850. Similarly, sovereign credit ratings apply to national governments, while
corporate credit ratings apply solely to corporations. (For related reading, see
"Credit Rating vs. Credit Score: What's the Difference?")

A short-term credit rating reflects the likelihood of the borrower defaulting within
the year. This type of credit rating has become the norm in recent years, whereas in
the past, long-term credit ratings were more heavily considered. Long-term credit
ratings predict the borrower's likelihood of defaulting at any given time in the
extended future.

Credit rating agencies typically assign letter grades to indicate ratings. Standard &
Poor’s, for instance, has a credit rating scale ranging from AAA (excellent) to C
and D. A debt instrument with a rating below BB is considered to be a speculative
grade or a junk bond, which means it is more likely to default on loans.
KEY TAKEAWAYS

 A credit rating is a quantified assessment of the creditworthiness of a

borrower in general terms or with respect to a particular debt or financial
obligation.
 A credit rating not only determines whether or not a borrower will be
approved for a loan or debt issue but also determines the interest rate at
which the loan will need to be repaid.
 A credit rating or score can be assigned to any entity that seeks to borrow
money—an individual, corporation, state or provincial authority, or
sovereign government.
 Individual credit is rated on a numeric scale based on the FICO calculation,
bonds issued by businesses and governments are rated by credit agencies on
a letter-based system.
 Benefits

At the consumer level, the agency’s ratings are used by banks to determine the risk
premium to be charged on loans and bonds. A poor credit rating shows that the
loan has a higher risk premium, and this prompts an increase in the interest charged
to individuals and entities with a low credit rating. A good credit rating allows
borrowers to easily borrow money from the public debt market or financial
institutions at a lower interest rate.

At the corporate level, companies planning to issue a security must find a rating
agency to rate their debt. Rating agencies such as Moody’s, Standards and Poor’s,
and Fitch perform the rating service for a fee. Investors rely on the ratings to
decide on whether to buy or not to buy a company’s securities.

Although investors can also rely on the ratings given by financial

intermediaries and underwriters, ratings provided by international agencies are
considered more reliable and accurate since they can access lots of information that
is not publicly available.

At the country level, investors rely on the ratings given by the credit rating
agencies to make investment decisions. Many countries sell their securities in the
international market, and a good credit rating can help them access high-value
investors. A favorable rating may also attract other forms of investments like
foreign direct investments to a country.

In addition, a low credit rating or relegation of a country from a high rating to a

low rating can discourage investors from purchasing the country’s bonds or
making direct investments in the country. For example, the downgrading of
Greece, Portugal, and Ireland by S&P in 2010 worsened the European sovereign
debt crisis.

Credit ratings also help in the development of financial markets. Rating agencies
provide risk measures for various entities, and this allows investors to understand
the credit risk of various borrowers. Institutions and government entities can access
credit facilities without having to go through lengthy evaluations by each lender.
The ratings provided by rating agencies also serve as a benchmark for financial
market regulations. Some laws now require certain public institutions to hold
investment-grade bonds, which have a rating of BBB or higher.

Importance of credit rating

Credit ratings for borrowers are based on substantial due diligence conducted by

the rating agencies. While a borrowing entity will strive to have the highest
possible credit rating since it has a major impact on interest rates charged by
lenders, the rating agencies must take a balanced and objective view of the
borrower’s financial situation and capacity to service/repay the debt.

A credit rating not only determines whether or not a borrower will be approved for
a loan but also determines the interest rate at which the loan will need to be repaid.
Since companies depend on loans for many start-up and other expenses, being
denied a loan could spell disaster, and a high interest rate is much more difficult to
pay back. Credit ratings also play a large role in a potential investor's determining
whether or not to purchase bonds. A poor credit rating is a risky investment; it
indicates a larger probability that the company will be unable to make its bond
payments.

The credit rating of the U.S. government according to Standard & Poor's, which
reduced the country's rating from AAA (outstanding) to AA+ (excellent) on
August 5, 2011.

It is important for a borrower to remain diligent in maintaining a high credit rating.

Credit ratings are never static; in fact, they change all the time based on the newest
data, and one negative debt will bring down even the best score. Credit also takes
time to build up. An entity with good credit but a short credit history is not seen as
positively as another entity with the same quality of credit but a longer history.
Debtors want to know a borrower can maintain good credit consistently over time.

Credit rating changes can have a significant impact on financial markets. A prime
example is the adverse market reaction to the credit rating downgrade of the U.S.
federal government by Standard & Poor’s on August 5, 2011. Global equity
markets plunged for weeks following the downgrade.

Credit Rating Process

The rating process begins with the receipt of formal request from a company
desirous of having its issue obligations rated by credit rating agency. A credit
rating agency constantly monitors all ratings with reference to new political,
economic and financial developments and industry trends. The process/ procedure
followed by all the major credit rating agencies in the country is almost similar and
usually comprises of the following steps.

1. Receipt of the request: The rating process begins, with the receipt of formal
request for rating from a company desirous of having its issue obligations under
proposed instrument rated by credit rating agencies. An agreement is entered into
between the rating agency and the issuer company. The agreement spells out the
terms of the rating assignment and covers the following aspects:

i. It requires the CRA (Credit Rating Agency) to keep the information confidential.

ii. It gives right to the issuer company to accept or not to accept the rating.

iii. It requires the issuer company to provide all material information to the CRA
for rating and subsequent surveillance.

2. Assignment to analytical team: On receipt of the above request, the CRA

assigns the job to an analytical team. The team usually comprises of two
members/analysts who have expertise in the relevant business area and are
responsible for carrying out the rating assignments.

3. Obtaining information:. The analytical team obtains the requisite information

from the client company. Issuers are usually provided a list of information
requirements and broad framework for discussions. These requirements are derived
from the experience of the issuers business and broadly confirms to all the aspects
which have a bearing on the rating. The analytical team analyses the information
relating to its financial statements, cash flow projections and other relevant
information.

4. Plant visits and meeting with management: To obtain classification and better
understanding of the client’s operations, the team visits and interacts with the
company’s executives. Plants visits facilitate understanding of the production
process, assess the state of equipment and main facilities, evaluate the quality of
technical personnel and form an opinion on the key variables that influence level,
quality and cost of production.

5. Presentation of findings: After completing the analysis, the findings are

discussed at length in the Internal Committee, comprising senior analysts of the
credit rating agency. All the issue having a bearing on rating are identified. An
opinion on the rating is also formed. The findings of the team are finally presented
to Rating Committee.

6. Rating committee meeting: This is the final authority for assigning ratings. 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 composite assessment of all
the factors concerning the issuer, with the key issues getting greater attention.

7. Communication of decision: The assigned rating grade is communicated finally

to the issuer along with reasons or rationale supporting the rating. The ratings
which are not accepted are either rejected or reviewed in the light of additional
facts provided by the issuer. The rejected ratings are not disclosed and complete
confidentiality is maintained.
8. Dissemination to the public: Once the issuer accepts the rating, the credit rating
agencies disseminate it through printed reports to the public. 9. Monitoring for
possible change: Once the company has decided to use the rating, CRAs are
obliged to monitor the accepted ratings over the life of the instrument. The CRA
constantly monitors all ratings with reference to new political, economic and
financial developments and industry trends. All this information is reviewed
regularly to find companies for ,major rating changes. Any changes in the rating
are made public through published reports by CRAs.

International Perspective of Credit Rating

The present chapter looks into the global credit rating scenario. Global credit rating
industry is a century-old. It has many a landmark development over its journey
through the century. The industry has grown manifold over the years. However, it
is dominated by two global players: Moody’s Investors Service and Standard and
Poor’s (S&P). These two agencies hold a near duopoly with Fitch IBCA and
DBRS and AM Best being relatively small players. Apart from discussions on the
significant milestones in the history ofrating agency developments, profiles of
major global and domestic rating agencies and their role in the development of
global financial system have been deliberated upon in this chapter to enable
understanding of the nature and extent of rating industry proliferation across the
globe, particularly in the South and South-East Asian region. The chapter initially
highlights the phases of CR industry development and then discusses the structure
of the industry, namely global and domestic, followed by the critical review of
each category.
 The Big Three Credit Rating Agencies

The credit rating industry is dominated by three big agencies, which control 95%
of the rating business. The top firms include Moody’s Investor Services, Standard
and Poor’s (S&P), and Fitch Group. Moody’s and S&P are located in the United
States, and they dominate 80% of the international market. Fitch is located in the
United States and London and controls approximately 15% of the global market.

Morningstar Inc. has been expanding its market share in recent times and is
expected to feature in the “top four rating agencies.” The U.S. Securities and
Exchange Commission (SEC) identified the big three agencies as the Nationally
Recognized Statistical Rating Organizations (NRSRO) in 1975.

The big three agencies came under heavy criticism after the global financial crisis
for giving favorable ratings to insolvent institutions like Lehman Brothers. They
were also blamed for failing to identify risky mortgage-backed securities that led to
the collapse of the real estate market in the United States.

In a report titled “Financial Crisis Inquiry Report,” the big three rating agencies
were accused of being the enablers of the 2008 financial meltdown. In a bid to
tame the market dominance of the big three, Eurozone countries have encouraged
financial firms and other companies to do their own credit assessments, instead of
relying on the big three rating agencies.
 Moody’s Investors Service

John Moody laid the foundation for Moody’s Investors Service in 1900, with the
publication of ‘Moody’s Manual of Industrial and Miscellaneous Securities’. The
manual provided information and statistics on stocks and bonds of various
financial institutions, government agencies, manufacturing, mining, utilities and
food companies. These publications had created a huge demand for themselves. By
1903, circulation had exploded. Due to stock market crash in 1907, Moody’s found
it hard to survive and was forced to sell its manual business. John Moody
reappeared in the 113 US financial market with a new idea. Instead ofselling crude
information, he offered investors an analysis of the quality of securities. It was the
first agency to broach the idea of using symbols to rank the credit quality of
various instruments. In 1909, Moody’s Investors Service rated US railroad bonds,
which marked the beginning of a new chapter in the history of financial services.
The new manual quickly found a place in investors’ hands. He used the “Aaa-
through-C” symbols that have since become a world standard to rate some 1500
individual securities of over 200 US railroads. This was followed by rating of
utility and industrial bonds in 1914, the year in which Moody’s Investors Service
was incorporated. Then on, Moody’s kept expanding its rating coverage to bonds
of diverse nature. The bonds issued by the US cities and municipalities were rated
by Moody’s in 1920. By 1924, Moody’s ratings covered nearly 100 percent of US
bond market. Moody’s unparalleled growth over just 15 years was quite
fascinating. However, at the initial phase of operation Moody’s had to face
pungent attitude from some sections. Mr. Moody reminisced: “In the spring of
1909 I brought the first edition of a new type of Railroad Manual which attempted
to analyse railroad reports and their bond issues. While it raised the storm of
opposition, not to mention ridicule from some quarters, it took hold with dealers
and investment houses...and long before 1914 it was a recognized authority and
‘Moody’s ratings’ have become an important factor in the bond trading and bond
selling field” (Rockwood, 2000). It should be noted in this context that Moody’s
played a commendable role in pioneering the concept of sovereign rating. In 1919
Moody’s assigned sovereign ratings to Britain, France and a few other countries.
During 1970s commercial paper and bank deposits were brought under Moody’s
rating arm. During the recession of 1970, investor confidence was seriously shaken
by Penn Central’s default on $ 82

Standard and Poor’s

Rating Services Founded by Henry Vamum Poor, Standard and Poor’s (S&P)
Corporation is a giant in the field of credit rating. The journey of S&P could be
studied in three time horizons. The first phase (1860-1940) may be viewed as the
beginning of long journey. The second phase (1941-1965) saw its development
through mergers and the third phase (1966 onwards) marked its global presence.
Poor’s Publishing published the History of Railroads in 1860. This served their
investors globally with useful information on rail-roads construction industry. It
was the first major attempt at compiling a comprehensive account of both
operational and financial details of US railroads. Luther Lee Blake, another
visionary like poor, 115 recognized the need for comprehensive financial
information for investors. In 1906 he set up Standard Statistics Bureau which was
engaged in the same line of business as Poor’s. Standards Statistics began to assign
debt ratings to corporate bonds in 1916 and sovereign debt ratings soon thereafter.
Both Poor’s Publishing and Standard Statistics ran their separate business of
publishing financial information and rating financial instruments until they merged
in 1941 to form Standard and Poor’s, a name synonymous with credit rating. It was
a publicly owned corporation till 1966 when McGraw-Hill, a leading international
publishing, media, information and financial service firm acquired its controlling
interest. The year 1969 was quite important for S&P; this year it began rating of
commercial paper and the same year it started charging issuers for municipal
ratings. This rating giant received NRSRO status in 1976 as a mark of recognition
of its wide-spread investor acceptance and market confidence in its independence
and objectivity. S&P marked its first presence in Asia opening office in Tokyo in
1986. In 2008 it expanded its operations in Middle East and Africa.

The same year it acquired Maalot of Israel, now called S&P Maalot. S&P is also a
majority shareholder of CRISIL.

With offices in 23 countries, S&P strives to provide market intelligence in the form
of credit rating, indices, investment research and risk analysis. In 2009 it published
more than one million new and revised credit ratings and rated more than US$ 32
trillion in outstanding debt. S&P offers rating services to all the major sectors of
economy, namely, corporates with focus on industries and utilities, financial
institutions, fund ratings, government and structured finance sector. Recently, S&P
has designed a rating scale for ASEAN region, the first ever attempt towards
regional standardization of rating scale.
 Fitch Ratings

John Knowles Fitch founded the Fitch Publishing Company on December 24, 1913
at Hanover in the New York City. Fitch Publishing Company started publishing
financial statistics, the leading customers of which included the New York Stock
Exchange. Thereafter, Fitch became a leader in providing critical financial
statistics to the investment community through the publications like Fitch Bond
Book and Fitch Stock and Bond Manual. The widely accepted rating scale of
‘AAA to D’ was first introduced by Fitch in the year 1924. Fitch was the one ofthe
three global agencies to be recognized as NRSRO in 1975. 1990s saw a significant
growth in Fitch’s activities. It expanded its operation in the field of structured
finance, investors’ research and many other complex credits. In 1997, Fitch
merged with London based IBCA Limited. With this merger Fitch became a
subsidiary of imalac S.A., a French conglomerate which had acquired IBCA in
1992. This merger helped realize Fitch’s dream of becoming a full service global
rating agency. In the year 2000, Fitch’s acquisition of Duff and Phelps, a Chicago
based rating agency, strengthened its position further. In the same year, Fitch
acquired Thomson Bank Watch. Frustrated with the refusal of NRSRO status
repeatedly, Thomson Bank Watch opted for the merger route. Built on a
foundation of organic growth and strategic acquisitions, Fitch Ratings has grown
rapidly during the last decade. It made its presence felt across all fixed income
markets throughout the world. Jointly headquartered at London and New York,
Fitch offers rating services for corporate finance, global infrastructure and project
finance, insurance, public finance, structured finance and sovereign and
supranational. Fitch runs its global operations through offices in around 50
countries.