Rating FAQs

Credit rating is essentially the opinion of the rating agency on the general creditworthiness or the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise.

Credit rating is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Such an opinion could be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Nepal Rastra Bank (NRB) and Securities Board of Nepal (SEBON) often use credit rating to determine eligibility criteria for some instruments. Credit ratings are also used for determination of risk weights for calculation of capital adequacy for banks as per regulatory guidelines of NRB. In general, credit rating is expected to bridge information asymmetry in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types.

The advantage of rating symbols is their simplicity, which facilitates universal understanding. Rating companies also publish explanations for their symbols used as well as the rationale for the ratings assigned by them, to facilitate deeper understanding.

It does not. The reason is that some factors, which are of significance to an investor in arriving at an investment decision, are not taken into account by rating agencies. These include reasonableness of the issue price or the coupon rate, secondary market liquidity and pre-payment risk. Further, different investors have different views regarding the level of risk to be taken and rating agencies can only express their views on the relative credit risk, and not on the risk appetite of the investors.

A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. Further, there is no privity of contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency. Nevertheless, rating is essentially an investor service and a rating agency is expected to maintain the highest possible level of analytical competence and integrity. In the long run, the credibility of a rating agency has to be built, brick by brick, on the quality of its services.

To answer the second question first, it is neither possible nor even desirable, to totally eliminate the subjective element. Ratings do not come out of a pre-determined mathematical formula, which fixes the relevant variables as well as the weights attached to each one of them. Rating agencies do a great amount of number crunching, but the final outcome also takes into account factors like quality of management, corporate strategy, economic outlook and international environment. To ensure consistency and reliability, a number of qualified professionals are involved in the rating process. Ratings are assigned by Committees, not individuals. Rating agencies also ensure that the rating process is insulated from any possible conflicts of interest.

The answer to both the questions is yes. In the well-developed capital markets, debt issues are, more often than not, rated by more than one agency. Also, it is only natural that the opinions given by two or more agencies may vary, in some cases. But it will be very unusual if such differences are very wide. For example, a debt issue may be rated DOUBLE A PLUS by one agency and DOUBLE A or DOUBLE A MINUS by another. It will indeed be unusual if one agency assigns a rating of DOUBLE A while another gives a TRIPLE B.

A rating is an opinion given on the basis of information available at a particular point of time. As time goes by, many things change, affecting the debt servicing capabilities of the issuer, one way or the other. It is, therefore, essential that as a part of their investor service, rating agencies monitor all outstanding debt issues rated by them. In the context of emerging developments, the rating agencies often put issues under rating watch and upgrade or downgrade the ratings as and when necessary. Normally, such action is taken after intensive interaction with the issuers.

Yes. In a situation where an issuer is unhappy with the rating assigned, he may request for a review, furnishing additional information, if any, considered relevant. The rating agency will then undertake a review and thereafter indicate its final decision. Unless the rating agency had overlooked critical information at the first stage, (which is unlikely), chances of the rating being changed on appeal are rare.

The rating process is a detailed exercise involving analysis of published financial information, visits to the issuer's office and works, intensive discussions with senior executives, auditors, bankers, etc. It also includes an in-depth study of the industry and environmental scanning. This process takes time, typically two to three weeks for a decision, provided all requested information is available. Rating agencies must ensure they do not compromise on analysis quality under pressure from issuers for quick results. Issuers should approach rating agencies well in advance to adhere to issue schedules.

Both. The rating of instruments considers specific characteristics such as maturity, credit enhancements specific to the issue, etc. Issuer ratings consider the overall debt management capability of an issuer over a medium-term perspective, typically three years. While issuer ratings are often one-time assessments of credit quality, instrument ratings are monitored over the life of the instrument.

CRNL's credit ratings are opinions on credit risk and do not constitute recommendations to buy, sell, or hold any security. Credit ratings do not consider many factors that influence investment decisions, such as:

• Whether specific rated securities are suitable investments for a particular investor or group of investors;
• Whether the expected return of a particular investment adequately compensates for the risk;
• Whether a rated security aligns with the investor's risk appetite;
• Whether the price of the security is appropriate or commensurate with its credit risk;
• Whether factors other than credit risk should influence the market price, and to what extent;
• Whether there will be a secondary market for the security;
• Whether there is prepayment risk on the security, etc.

CRNL's ratings are based on information obtained from sources believed by it to be accurate and reliable. CRNL does not, however, guarantee the accuracy, adequacy, or completeness of such information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRNL does not perform an "audit" in connection with the rating exercise nor does it undertake a forensic exercise to detect fraud. On occasions, CRNL may rely on unaudited financial information. Moreover, most entities whose bank facilities/instruments are rated by CRNL have paid a credit rating fee, based on the amount and type of bank facilities/instruments.