A good credit rating can ease the process of raising money, and give you the necessary edge to negotiate the terms and conditions
Educomp Solutions, a tech-driven education company received a rating of SME1 (top rating for SMEs) by the leading credit rating agency CRISIL in September 2005 with the validity of a year.
The promoters decided to take the company public soon after through a successful IPO, which was oversubscribed 34.96 times. The credit rating helped the company gain investor confidence during the IPO process. Armed with the top rating the next year, Educomp raised Rs 116 crore through issuance of equity shares and Foreign Currency Convertible Bonds (FCCB).
| Leading Government-approved CRAs in India |
| 1. Credit Rating Information Services of India Limited (CRISIL) http://www.crisil.com 2. Investment Information and 3. Credit Analysis & Research 4. Fitch Ratings, India |
| A CRA in India may take anywhere between a week and a month to finish the due diligence process and rate an organization. A CRA charges may vary from Rs 40,000 to Rs 15 lakh. The cost depends upon the size of the organization, depth of the study, time taken, effort required, etc. Rating is granted for a period of one financial year, during which the organization is kept under constant surveillance by the CRA. In case of any inconsistencies, the CRA reserves the right to change the rating of the concerned organization. |
What is credit rating?
Credit rating reflects an organization’s credit-worthiness, which is determined by the company’s probability of meeting its financial obligations. These may be in the form of debt servicing or equity allocation. Credit rating provides the ratee company insights into its strengths and weaknesses as the extensive due-diligence that rating agencies carry out reveal loopholes in the performance, strategy and managerial setup. This helps organizations understand and manage their risks better. Credit rating holds special significance for a startup since a good rating does away with the need for an in-depth due-diligence on the part of the potential investors or financial institutions and provides the startup negotiating power to work out a better equity deal, or in case of debt, lower interest rates. A good credit score establishes your credibility and ability to pay back on time and hence helps in raising debt. Contrary to this, a bad rating could lead to acquiring credit at higher interest rates, known as risk-premium.
Credit rating is done by Credit Rating Agencies (CRAs). Moody’s, Standard and Poor’s (S&P’s) and Fitch IBCA are the top three agencies in the world. In India, there are several government-approved agencies providing ratings to individual borrowers, SMEs and large and small corporate entities. CRISIL (Credit Rating and Information Services of India Limited), CARE (Credit Analysis and Research Limited), ICRA (an associate of Moody’s) and Fitch Ratings are the leading registered CRAs in India. Fitch Ratings India is a 100% subsidiary of the international credit rating agency, Fitch Ratings. It is the only international credit rating agency providing its services in India. CRAs are regulated by the SEBI (Credit Rating Agencies) Regulations, 1999 and the Credit Information Companies (Regulation) Act, 2005, which lay down certain guidelines in accordance with which CRA in India are allowed to register and function.
 |
Rating
Virtually anything involving money can be rated. CRAs usually divide the ratees into two categories – issues and issuers. Issues can comprise any debt instruments (bonds, commercial papers, etc), funds, IPOs, or in fact, any money instruments; Issuers are the organizations issuing the concerned instrument. The issuer can be a big corporate or an SME (Small and Medium Enterprise), an established entity or a startup. CRAs usually rate issues based on long-term or short-term requirements.
When a company is rated, it could be from a long-term or short-term perspective depending on its requirements and agreement with the rating agency. A company can get a rating even without any immediate plan of coming out with a public issue. As and when required, it can go for debt instruments or an equity issue, depending on its debt policy and capital structure, although the issues will need separate rating. However, the leverage obtained from a good issuer rating is enough to have made several companies in India go for issuer rating.
The rating is a result of the financial, non-financial, legal and risk evaluation of your company. For different industries, the rating process is different. For example, the rating process for a manufacturing or infrastructure company will be different from a banking company. Irrespective of the size or nature of the issuer, however, the rating rationale is the same - credit-risk assessment.
Credit risk assessment involves an in-depth study of the company’s financial history, level of technological development, risk-management systems, cash flow, liquidity, legal framework, resilience to market fluctuations, etc. A few factors that are given emphasis during the financial history evaluation are credit performance, which includes the company’s credit payment history, current debts, length of credit history, credit type mix and frequency of applications for new credit; financial ratios, such as liquidity ratios; efficiency ratios, such as asset turnover ratio and profitability ratios, such as net profit margin, return on investment (ROI), etc. These factors are given due weight-age depending on the industry, the company’s business and market position.
Subscribe to this comment's feed
written by Pikalainaa, August 02, 2010
| < Prev | Next > |
|---|
