credit rating and securitisation

7/29/2019 Credit Rating and Securitisation

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Originated in US

1860 , Henry started.

1909 Moodys Investors Agency

1933-34 controller of currency


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Credit Rating Information Services of India Ltd1987.


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CRISIL: Credit rating is an and opinion as toissuers to meet itsfinancial obligations. It

tobuy/sell or hold a particularsecurity.


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1.Credit rating is an assessment of the capacityof an issuer of debt security , by anindependent agency, to pay interest andrepay the principal as per the terms of issue

of debt.

2. Given after objective judgment of a team ofexperts from rating agency


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3. expressed in code no 4. guidance & not recommendation to

investors.

5. In India rating is done for particularsecurity and not for a company as a whole.

6. no fiduciary relationship.


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1. Credit Rating and Information Services Ltd

(CRISIL) was setup as the first agency in 1988.

2. ICRA Ltd (investment information and creditRating Agency of India Limited) in 1991.

3. Credit Analysis and Research Ltd (CARE) in

1993.


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Duff and Phelps credit rating India Pvt Ltd

(DCR)- leading international credit rating

agencyJ.M. Financial & Alliance group in joint

venture with D&P in India.

Onida Individual Credit Rating Agency Ltd.

(ONICRA)


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Provides Superior Information

Low Cost Information

Basis for a Proper Risk and Return

trade off

Healthy discipline on Corporate

borrowers

Greater Credence to Financial and other

Representation


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low cost information.

Quick investment decision

Safeguards against bankruptcy

Systematic risk evaluation

Recognition of Risk

Easy understandability of investment

proposal.

Independence of Investment Decisions

Choice of Investments.


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Lower cost of borrowing

Sources of additional certification Increase investors population

Forewarns risk

Wider audience for borrowing Rating as marketing tool

Motivation for growth

Benefits to brokers and financial

intermediaries.

Benefits industry as a whole


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1. registration

2. general obligation

3. restriction on rating of security.

4. procedure of inspection and investigation 5. action incase of default.


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1. REGISTRATION compulsorily with theSEBI- non refundable fee of Rs50000/-

- should be set up & registered as company

- rating activity main objective in MOA.

- adequate infrastructure.

- 5 crore net worth.

2. GENERAL OBLIGATION

- make all effort to protect interest ofinvestors

- high standard of dignity, integrity.


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-Fulfill its obligation in a prompt , ethical ,professional manner.

-Agreement with client

- disclosure of rating definition

- submission of info to SEBI.

3. PROCEDURE FOR INSPECTION ANDINVESTIGATION

SEBI empowered to appoint the inspectingofficers.

4. DEFAULT actions will be taken.


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CRISIL has been promoted by

- Industrial Credit and Investment Corporation

of India Ltd (ICICI) and

- Unit Trust of India (UTI) as a public limited

Company (incorporated in 1988 )

- head quarters at Mumbai.


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Assist both individual and institutional

investors in making investment decisions infixed income securities.


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Enable corporate to raise large amt at fair cost

from wide spectrum of investors.

Enable intermediaries in placing theirinstruments with investors.


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1. analysis of past performance.

2. future prospectus.

PAST PERFORMANCE:

Not a guide but to view why co performed in certain

manner, what problems faced, what was the

managements response.


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FUTURE PROSPECTUS:

1.Industryanalyzing the demand & supply,

growth, nature and basis of competition, govt

policy and its effects in future.

2.Co position within the industry- to

understand how the co would be in the future.


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3. operating efficiency:

locational advantage, raw material, power,

labour situation , cost structure compared to

its nearest competitors, market position interms of market share, selling n distribution

arrangements, customer delivery etc.


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4.Evaluation of management- with reference to its

track record, recruitment and training system

planning & control sytm, depth of managerial talents,

goals, philosophy of the co, attitudes towards taking

business risks.


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5. Cash flow projection of the co- CRISIL

makes its own assessment of cash flows and

checks the comfort and also checks the ability

to raise funds quickly.


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Use both qualitative & quantitative methods.

Uses multi layered decision making process.

2 teams.

team will meet the officials and make

assessment of industry , co, mgt.

Both team interact with each other


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present their findings simultaneously in a

detailed note to the Branch InternalCommittee- comprises 3 senior analysts of

CRISIL and internal committee of 6 senior

executives &

thereafter the note is presented with the

recommended ratings to the rating

committee

Evaluation is done on confidential basis.


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High Investment grades AAA ( Triple A) : Highest safety. AA (Double A) : High Safety Investment grades:

A : Adequate Safety BBB(Triple B) : Moderate safetySpeculative grades BB : In adequate safety

B : high risk C : substantial risk D : default


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Preference shares rating are similar exceptthe letter PF are prefixed to the rating.


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Investment grades FAAA (F Triple A) : Highest safety. FAA ( F Double A ) : High Safety FA : Adequate Safety

Speculative grades FB : In adequate safety FC : High risk FD : default


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P-1- very strong.

P2 - strong.

P3 adequate

P4 - minimal

F5 - Instrument is expected to be in default an

maturity are in default.


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1. ACC Limited - Construction Materials Non Convertible Debenture

CRISIL AAA Stable

2. Air India Limited Airlines

Non Convertible Debenture(SO)

CRISIL AAAStable


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IICRA has been promoted by IndustrialFinance Corporation of India as its mainpromoter with its head quarters at New Delhi


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Long term-Including, Debentures Bonds, Preference

Shares LAAA-Highest safety, indicate fundamentally strong

position Risk factors are negligible. LAA -High Safety

LA - Adequate Safety. LBBB - Moderate Safety LBB - Risk prone. LC - Substantially Risk

LD - Default


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Mediums Form Including certificates ofDeposit and Fixed Deposits programmers

MAAA Highest Safety.

MAA- High Safety

MA - Adequate safety

MB- Inadequate safety

MC- Risk prone

MD-Default


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Short Term including Commercial Papers:

A1+ Highest Safety

A2+ High Safety. The relative safe. A2 A3+ Adequate Safety

A4+ Risk prone.

A5+ default.


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CARE is a credit rating and information

services company promoted by IDBI jointly

with investment institutions, banks andfinance companies.

The first company commenced its operations

in October 1993 and announced its first

rating in 1993.


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CARE AAA Instrument carrying this rating

are considered to be CARE AAA (FD) / (CD) ofthe best quality carrying negligible investment(SO) / (CCPS) risk.

CARE AA High quality by all standards

CARE A Many favorable investment attributes CARE BB Instruments are speculative

CARE C High risk

CARE D Lowest category.


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PR-1- Superior capacity for repayment of short term

promissory obligation. PR-2 Strong capacity for repayment of short term

promissory obligations. PR-3 Instruments have an adequate capacity for

repayment of short term promissory obligations . PR-4 Minimal degree of safety.

CARE 1 Excellent debt management capability CARE 2 Very good debt management capability CARE 3 Good capability for debt management CARE 4 Barely satisfactory capability for debt management CARE 5 Poor capability for debt management.


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The Portfolio has been rated as PR 1 + SOHighest Safety by CARE


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Securitization of asset or debt refers to

the process of liquidating the illiquid and long

term assets like loans and receivables of financial

institutions and banks by issuing marketable

securities against them.


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Definition:

Securitization means liquefying assets

comprising loans and receivables of an

institution through systematic issuance

of financial instruments


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Removing long term assets from the balance

sheet of a lending financial institutions &

replacing them with liquid cash through the

issue of securities against them.


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The entity that intermediates between the

originator of the receivables and the end-

investors is called SPV.


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Parties involved:

1. Originator It is the entity on whose books

the assets to be securitised exist.

It sells the assets on its books and receives

the funds generated from such sale.

the originator transfers both the legal andthe beneficial interest in the assets to the

SPV.


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2. Special purpose vehicle (SPV) The issuer

also known as the SPV is the entity that would

typically buy the assets (to be securitised)

from the originator. It plays a very crucial rolein as much as it holds the assets in its books

and thereby removes the assets from the

balance sheet of the originator


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2. Investors The investors may be in the

form of institutional investors like FIs, mutual

funds, provident funds, pension funds,

insurance companies, etc. They buy aparticipating interest in the total pool of

receivables and receive their payment in the

form of interest and principal as per agreed

pattern.


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3. A merchant or investment banker4. A credit rating agency5. The original borrower

Stages in ol ed


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Stages involved:

1. Identification stage

2. Transfer stage

3. Issue stage

4. Redemption stage

5. Credit rating stage


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The development in the Indian

securitisation market has been largely come

by retail assets and residential mortgages

of banks and financial institution (FIs).

This market has been in existence since the

early 1990s, though has matured

significantly only post-2000


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In India, issuers have usually been

private sector banks, foreign banks

and non-banking financial companies

(NBFCs) with their original assets

being mostly retail and corporateloans.


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Major investors are mostly mutual

funds (money market/liquid schemes),

close-ended debt schemes and banks.

Long-term investors like insurance

companies and provident funds arecurrently not active due to regulatory

constraints.


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1. Pass through and pay through certificates2. Preferred stock certificates

3. Asset based commercial papers

4. Others-

Interest only certificates

Principal only certificates


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Additional source of fund Greater profitability Enhancement of capital adequacy ratio Spreading of credit risk

Provision of multiple instruments Higher rate of return Prevention of idle capital Better instruments


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Feb 1991- securitization of ICICI sreceivables by Citibank

securitization of Hire purchase portfolio ofTELCO


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Receivables from government departmentsand companies

Hire purchase loans

Lease finance

Term loans

Mortgage loans etc.

credit rating and securitisation

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