Rating FAQs (2024)

Table of Contents

A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating. A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers. A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an investment decision. Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment, the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations. A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not. An accurate assessment of the credit rating of an entity depends on the availability of adequate and reliable information on the rated entity. Moreover, ratings by CRISIL Ratings are under continuous surveillance over the life of the instrument which necessitates that CRISIL Ratings has continuous access to adequate and reliable information on the rated entity to ensure that its rating reflects the most recent credit opinion. Absence of information significantly affects the ability to make accurate assessment of business, financial and management risk of an entity which drives the credit rating. Please refer to CRISIL Ratings criteria titled 'Assessing Information Adequacy Risk’. In case the rated entity does not provide information and/or does not facilitate meetings with key personnel required for rating, that entity may be classified as Issuer Non Cooperative (INC). For entities classified as INC, CRISIL Ratings will continue to review the ratings on an ongoing basis throughout the instrument/facility’s lifetime, on the basis of best available information. In case an issuer has an investment grade rating outstanding with INC suffix for more than six months, then that will be necessarily downgraded to the non-investment grade, while maintaining the INC status. This is line with SEBI circular dated January 03, 2020 titled ‘Strengthening of the rating process in respect of INC ratings’ and subsequent clarifications provided by SEBI. In line with the requirements of SEBI’s Jan 03, 2020 circular and subsequent clarifications from SEBI, CRISIL Ratings before taking up a rating assignment for an issuer not having an outstanding rating with CRISIL Ratings, shall examine the issuer’s cooperation status with other CRAs. If the issuer’s rating from all other CRA(s) (OCRA) has persistently remained in the issuer-not-cooperating (INC) category for 12 months or more, CRISIL Ratings shall not assign rating for the issuer’s facilities. For issuers having an existing outstanding rating with CRISIL Ratings, CRISIL Ratings shall continue to surveil and/or assign ratings to new instruments as per extant regulations and policies, and the cooperation status with other CRAs will have no bearing on the same. For further details, please refer to: https://www.crisil.com/content/dam/crisil/generic-images1/our-businesses/ratings/regulatory-disclosure-highlighted-policies/regulatory-disclosures/sebi/disclosures-as-per-sebis-circular-sebihomirsdmirsd4cirp2016119/Operating-Guidelines-and-Policies-as-required-to-be-published-under-SEBI.pdf A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default. Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating. Alternative revenue models (such as the one based on investor fees) pose numerous challenges in terms of ease and practicality of implementation that have not yet been overcome. Although the issuer pays for the rating, the investor uses it. Like any other product or service, the 'value' of the rating depends entirely on the perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. (Please also refer to section - How CRISIL Ratings manages Conflict of Interest). The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. CRISIL Ratings is accredited by Reserve Bank of India (RBI) for providing bank loan ratings. Competition in the credit rating industry is desirable to meet the 'better service at a cheaper price' objective on an ongoing basis. However, it is essential to guard against some undesirable effects of competition, such as lax ratings or sub-optimal quality of research and analysis. Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset monitoring. CRISIL Ratings uses simple alphanumeric symbols to convey credit ratings. CRISIL Ratings assigns credit ratings to debt obligations on two basic scales: the long-term scale and the short-term scale. Please refer to the section on Rating scale for more details. Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever. CRISIL Ratings assigns ratings to long- and short-term structured finance instruments by using a suffix ‘(SO)’. Rating with ‘(SO)’ suffixare assigned only to securitised or asset-backed transactions having credit enhancement/structure that leads to the instrument being bankruptcy remote from the issuer/originator. A suffix of '(SO)' indicates that the obligation being rated is a “structured obligation” that is different and distinct from the “general obligations” of an issuer/originator. CRISIL Ratings assigns ‘CE’ suffix to ratings to long-and short-term instruments that are backed by explicit credit enhancement that is external (or from a third party, parent or group), but the rated instrument is not bankruptcy remote from the issuer/originator. Credit ratings are assigned either to specific instruments or to the general debt obligations of issuers. CRISIL Ratings assigns credit ratings to debt obligations. A rating is valid until it is withdrawn which is usually when the rated debt obligation is fully paid. Please refer to the Policy for withdrawal of ratings for further details. Once a credit rating is assigned and published, CRISIL Ratings keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance process may result in credit rating changes from time to time. All changes in CRISIL Ratings’ credit ratings are communicated publicly through CRISIL Ratings’ website (www.crisilratings.com) and media releases. Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these variables can change, causing the rated entities' performance to deviate significantly from expectations. This is reflected in their changed credit ratings. Not necessarily. In most cases, a downgrade does not mean that a default is anticipated. All it indicates is that the risk associated with the debt obligation is relatively higher than what it was before the downgrade. No. What matters is the size of the total debt in the company, and not the amount that is sought to be rated. In instances where completion of certain steps/documentation are pending at the time of rating assignment and the rating is contingent upon occurrence of pending steps or execution of pending documents, CRISIL Ratings assigns provisional ratings to such instruments which are characterised by a prefix 'Provisional' to the rating symbol. To elaborate, a prefix of 'Provisional' to a CRISIL Ratings-assigned rating indicates that the rating centrally factors in the completion of the critical steps/documentation; without this, the rating would either have been different or not assigned ab initio. The provisional nature of such ratings will be disclosed by CRISIL Ratings in its communications, including rating letter and rating rationale.

1. What is a credit rating?

A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating.

2. How does a credit rating agency differ from a credit bureau?

A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers.

3. Is a credit rating a recommendation to invest in a debt instrument?

A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an investment decision.

Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment, the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations.

5. How does a credit rating differ from an audit?

A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not.

6. How does a credit rating agency (CRA) operate when issuers' disclosure levels are low?

An accurate assessment of the credit rating of an entity depends on the availability of adequate and reliable information on the rated entity. Moreover, ratings by CRISIL Ratings are under continuous surveillance over the life of the instrument which necessitates that CRISIL Ratings has continuous access to adequate and reliable information on the rated entity to ensure that its rating reflects the most recent credit opinion. Absence of information significantly affects the ability to make accurate assessment of business, financial and management risk of an entity which drives the credit rating. Please refer to CRISIL Ratings criteria titled 'Assessing Information Adequacy Risk’. In case the rated entity does not provide information and/or does not facilitate meetings with key personnel required for rating, that entity may be classified as Issuer Non Cooperative (INC). For entities classified as INC, CRISIL Ratings will continue to review the ratings on an ongoing basis throughout the instrument/facility’s lifetime, on the basis of best available information.

In case an issuer has an investment grade rating outstanding with INC suffix for more than six months, then that will be necessarily downgraded to the non-investment grade, while maintaining the INC status. This is line with SEBI circular dated January 03, 2020 titled ‘Strengthening of the rating process in respect of INC ratings’ and subsequent clarifications provided by SEBI.

7. Will CRISIL Ratings assign a rating to instruments of an issuer who has persistently remained INC from all other CRAs?

In line with the requirements of SEBI’s Jan 03, 2020 circular and subsequent clarifications from SEBI, CRISIL Ratings before taking up a rating assignment for an issuer not having an outstanding rating with CRISIL Ratings, shall examine the issuer’s cooperation status with other CRAs. If the issuer’s rating from all other CRA(s) (OCRA) has persistently remained in the issuer-not-cooperating (INC) category for 12 months or more, CRISIL Ratings shall not assign rating for the issuer’s facilities.

For issuers having an existing outstanding rating with CRISIL Ratings, CRISIL Ratings shall continue to surveil and/or assign ratings to new instruments as per extant regulations and policies, and the cooperation status with other CRAs will have no bearing on the same.

For further details, please refer to: https://www.crisil.com/content/dam/crisil/generic-images1/our-businesses/ratings/regulatory-disclosure-highlighted-policies/regulatory-disclosures/sebi/disclosures-as-per-sebis-circular-sebihomirsdmirsd4cirp2016119/Operating-Guidelines-and-Policies-as-required-to-be-published-under-SEBI.pdf

8. Does a credit rating assure repayment?

A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default.

9. Who pays for a credit rating?

Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating. Alternative revenue models (such as the one based on investor fees) pose numerous challenges in terms of ease and practicality of implementation that have not yet been overcome.

10. If the issuer pays for the rating, how does a CRA maintain its independence?

Although the issuer pays for the rating, the investor uses it. Like any other product or service, the 'value' of the rating depends entirely on the perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. (Please also refer to section - How CRISIL Ratings manages Conflict of Interest).

The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. CRISIL Ratings is accredited by Reserve Bank of India (RBI) for providing bank loan ratings.

12. Is competition desirable in the credit rating industry?

Competition in the credit rating industry is desirable to meet the 'better service at a cheaper price' objective on an ongoing basis. However, it is essential to guard against some undesirable effects of competition, such as lax ratings or sub-optimal quality of research and analysis.

13. How do investors benefit from a credit rating?

Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset monitoring.

14. What do the various credit rating symbols mean?

CRISIL Ratings uses simple alphanumeric symbols to convey credit ratings. CRISIL Ratings assigns credit ratings to debt obligations on two basic scales: the long-term scale and the short-term scale. Please refer to the section on Rating scale for more details.

15. Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability?

Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever.

16. What are Structured Obligation (SO) ratings? Are they different from other credit ratings?

CRISIL Ratings assigns ratings to long- and short-term structured finance instruments by using a suffix ‘(SO)’. Rating with ‘(SO)’ suffixare assigned only to securitised or asset-backed transactions having credit enhancement/structure that leads to the instrument being bankruptcy remote from the issuer/originator. A suffix of '(SO)' indicates that the obligation being rated is a “structured obligation” that is different and distinct from the “general obligations” of an issuer/originator.

17. What are Credit Enhancement (CE) ratings?

CRISIL Ratings assigns ‘CE’ suffix to ratings to long-and short-term instruments that are backed by explicit credit enhancement that is external (or from a third party, parent or group), but the rated instrument is not bankruptcy remote from the issuer/originator.

18. What is the validity period of a credit rating?

Credit ratings are assigned either to specific instruments or to the general debt obligations of issuers. CRISIL Ratings assigns credit ratings to debt obligations. A rating is valid until it is withdrawn which is usually when the rated debt obligation is fully paid. Please refer to the Policy for withdrawal of ratings for further details.

19. How are credit rating changes communicated?

Once a credit rating is assigned and published, CRISIL Ratings keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance process may result in credit rating changes from time to time. All changes in CRISIL Ratings’ credit ratings are communicated publicly through CRISIL Ratings’ website (www.crisilratings.com) and media releases.

20. Why do credit ratings change?

Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these variables can change, causing the rated entities' performance to deviate significantly from expectations. This is reflected in their changed credit ratings.

21. If a credit rating is downgraded, does it mean that a default is imminent?

Not necessarily. In most cases, a downgrade does not mean that a default is anticipated. All it indicates is that the risk associated with the debt obligation is relatively higher than what it was before the downgrade.

22. Does the size of the rated debt obligation affect its credit rating?

No. What matters is the size of the total debt in the company, and not the amount that is sought to be rated.

23. What are 'Provisional' ratings?

In instances where completion of certain steps/documentation are pending at the time of rating assignment and the rating is contingent upon occurrence of pending steps or execution of pending documents, CRISIL Ratings assigns provisional ratings to such instruments which are characterised by a prefix 'Provisional' to the rating symbol. To elaborate, a prefix of 'Provisional' to a CRISIL Ratings-assigned rating indicates that the rating centrally factors in the completion of the critical steps/documentation; without this, the rating would either have been different or not assigned ab initio. The provisional nature of such ratings will be disclosed by CRISIL Ratings in its communications, including rating letter and rating rationale.

A provisional rating shall be converted into a final rating following receipt of transaction documents duly executed and/or confirmations on completion of pending steps, as applicable, within 90 days from the date of issuance of the instrument. In case of pending steps / documentation at the end of 90 days from the date of issuance of instrument, CRISIL Ratings may grant extension of upto 90 days from the expiry of the above mentioned validity period, on a case to case basis.. Please refer to CRISIL Ratings’ Policy on provisional ratings for further details.