FINSHASTRANewsletter of Finance Cell, MIB Vol X | Issue I | Aug 15, 2011
THE
Your Gateway to Finance
Credit RatingsAmidst Uncertain Times
TEAM FINSHASTRAVaibhav Gupta
Aanchal KhanejaSikha Rathi
Shampy AgarwalAbhishek GuptaNeetu Sherawat
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YOUR FINANCE VOCAB
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Credit Rating: A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by credit rating agency of the debt issuers' likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. The top credit rating issued by the main agencies, Standard & Poor's, Moody's and Fitch, is AAA or Aaa.
Credit Analysis: Credit analysis means the process of analyzing the credit conditions of an individual, a bank or a country by looking at their financial conditions. These included balance sheets, income statements and cash flow statements for a firm, or national accounts for a country. Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis also includes an examination of collateral and other sources of repayment as well as credit history and management ability.
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Credit Bureau: A credit bureau is an organization that tracks the credit histories and related information of individuals. Whenever a person applies for credit, housing, employment, or anything else that their credit history could have an impact on, their potential creditor, landlord or employer can check the information on file with the credit bureau. If the credit bureau shows less-than-satisfactory information in its report on the person, it may affect the person's chances of receiving the credit, lease, or job. A poor credit report can also result in higher interest rates on a loan or credit card The three largest credit bureaus in the U.S. are Equifax, Experian and TransUnion. In India prominent credit bureau is CIBIL.
Credit Default Swap: A credit default swap is the simplest type of credit derivative. Basic CDS contracts are similar to insurance. They allow one party to buy protection against a company or country defaulting or restructuring their debt over a certain period of time. The buyer pays an annual fee in basis points based on a notional amount to the contract seller. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.
Bond Rating: Bond Rating is a measure of the quality and safety of a bond, based on the issuer's financial condition. Credit ratings agencies conduct credit analysis in order to provide bond ratings; the criteria and the ratings themselves may change these from time to time. Bond ratings are important to bond investors as they make investment decisions. More specifically, an evaluation from a rating service indicating the likelihood that a debt issue will be able to meet scheduled interest and principal repayments. Typically, AAA is highest (best), and D is lowest (worst).
File Freeze: Consumers can request that the credit bureaus freeze their credit reports. This freeze stops new credit from being issued in your name by blocking creditors, lenders, insurers and other companies from accessing your credit data. In some cases, a $10 fee for each credit bureau is required to process the file freeze. The freeze can also be temporarily or permanently undone for an additional fee.
FICO Score: FICO Score is a way of measuring an individual's creditworthiness. A FICO score is a quantification of a variety of factors in an individual's background, including a history of default, the current amount of debt, and the length of time that the individual has made purchases on credit. A FICO score ranges between 350 and 850. In general, a score of 650 is considered a "fair" credit score, while 750 or higher is considered "excellent." A FICO score is a convenient way to summarize an individual's credit history and is included in a credit report. The term comes from the Fair Isaac Corporation, which created the system.
Sovereign Credit: Sovereign credit is the credit of a sovereign country backed by the financial resources of that state. Sovereign credit is the opposite of sovereign debt. Fiat money is sovereign credit and sovereign bonds are sovereign debts. When money buys bonds, sovereign credit cancels sovereign debt.
CREDIT RATINGS- PRESENT SCENARIO
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You may ask how exactly credit rating matters. In simple words, a credit rating gives the investor an idea about the creditworthiness of the debtor and the risk of default. If a bond has a low credit rating, it means there is more risk. As credit rating is a parameter for the credibility of all the issuer of debts either by government or corporate, it is a general aspect that the trends evolving out of it are a day to day story.Within the context of present scenario, the term is very commonly used, in fact has become a mundane affair. With all the speculation and manifestation going around the world regarding the “US Debt crisis”, no wonder the mass is witnessing the changes that are taking place around the globe.Here are some of the recent happenings which are taking place with the reference of credit rating.The world's largest creditor has lost its top credit rating for the first time in the last 70 Years. Standard & Poor's (S&P, one of the top three credit rating agencies in US) has downgraded long term US debt from AAA to AA+. The credit rating agency asserted a negative outlook on long term US debt. To avoid a downgrade, S&P said the US needed to not only raise the debt ceiling, but also develop a "credible" plan to reduce the federal debt by at least $4 trillion over the next decade.S&P ruled that the US fell short: "The downgrade reflects our opinion that the ... plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."This change in the ratings has raised the paranoid that the downgrade will also add billions to the US government's interest bill.The other rating agencies, Moody's and Fitch, have said they have no immediate plan to downgrade the US rating giving the government more time to make progress on debt reduction.India's finance minister has termed the US credit losing as “GRAVE”. According to him it will take time to analyse the downgrade situation properly.
Standard & Poor credit rating: Asia moves to calm US debt downgrade fear. Australian stocks plunged 4 percent ,the worst losses seen in
a single session since the height of the 2008 financial crisis, but Australia's Gillard insisted that the country's economic fundamentals were strong and could weather any financial storms that were brewing.
Japan, the second-largest global investor in the US government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity. Policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion in the securities and the nation's official Xinhua News Agency said in a commentary that the US must cure its “addiction” to borrowing.
The finance minister's th
statement came after Indian shares hit a 13-monthly intraday low on Friday (5 August 2011) on the back of US economic worries and the European debt crisis.
Market regulator, the Securities and Exchange Board of India (SEBI), has urged investors in the country's market to stay calm despite the sharp fall and said it was "closely watching the situation". Earlier in the week, a top Indian government advisory panel cut the growth forecast for Asia's third-largest economy from 9 percent to 8.2 percent, citing the impact of a string of interest rate hikes and global uncertainty.
Amid the downgrading of US ratings,
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CREDIT RATINGS- PRESENT SCENARIO
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With all these issues going around the world, one thing has stood out clearly for sure, is that the downgrading of the credit ratings of US government has removed it from the world's risk-free borrowers for the very first time. These ratings thus plays a very important as the example has been set by the recent downgrading how the world market has tumbled over a few days.
Hence the present scenario is all about anticipating how US government will get out of this “DEBT ceiling” and how it will regain its AAA rating once again. The upcoming days will clarify the picture as to how the world economy is going to be affected by the recent happenings keeping in my mind that a huge paranoid is going on across the global markets regarding the structuring that is about to shape.
Malvi Goyal
MIB 2011-13
AROUND THE WORLDCREDIT RATING AGENCIES- INDIA AND
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In a world of uncertainties of every form, everyone looks around for some sort of support to base their decisions on. When it comes to investing hard earned money into securities and bonds for the purpose of obtaining long term benefits over a period of time, this decision becomes even more critical. The risk pertaining to the scare of default grows with the quantum of investments made. In other words, the risk of default is directly proportionately to the amount of money invested. Consider this in terms of bonds purchased by sovereign nations amongst each other and the risk is almost unquantifiable. But nations and individuals need to invest and this is where “CREDIT RATING AGENCIES” come into the picture. They have gained pivotal importance over a period of time and have become an indispensable part of investment decisions. Credit Rating provides individual and institutional investors with information that assists in determining whether issuers of debt obligations and fixed-income securities will be able to meet their obligations with respect to those securities. Credit rating agencies provides investors with objective analyses and independent assessments of companies and countries that issue such securities.
Global Top 3 Credit Rating Agencies1. Standard & Poor's:
The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.
Moody's provides research data and analytic tools for assessing credit risk, and publish market-leading credit opinions, deal research and commentary, serving more than 4,800 institutions in 115 countries.
Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
A credit rating agency is a potential source of information for market participants who are trying to ascertain the creditworthiness of borrowers. Essentially, rating agencies offer judgments (they prefer the word "opinions") about the quality of bonds issued by corporations, governments and mortgage securities. These judgments generally come in the form of letter grades. The best-known scale is that used by Standard & Poor's (S&P) and some other rating agencies: AAA, AA, A, BBB, BB, etc., with pluses and minuses as well.
With offices in 23 countries and a history that dates back 150 years, Standard & Poor's is known to investors worldwide as a leader of financial-market intelligence. S&P strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment tools and research, and risk evaluations and solutions.
2. Moody's: Moody's is the oldest credit rating agency. It is also the first rating agency to be recognized by NRSRO in 1975. The company became public in 2000.
Moody's rating scale is as follows, from excellent to poor :
CREDIT RATING AGENCIES- INDIA AND AROUND THE WORLD
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3. Fitch:
Indian Top 3 Credit Rating Agencies1. Credit Rating and Information Services in India Limited (CRISIL):
ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.
3. Credit Analysis and Research Limited (CARE): Care Ratings is a full service rating company that offers a wide range of rating and grading across sectors. Care has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. CARE is recognized by Securities and Exchange Board of India (SEBI), Government of India (GoI) and Reserve Bank of India (RBI).
Fitch is smallest among the top three agencies. It is a part of Fitch Group, a subsidiary of Fimalac S.A FIM.PA. It was the third agency to become an NRSRO in 1975. From 1975 to 1992, four other agencies were recognized as NRSROs and all subsequently merged with Fitch. Fitch Ratings is a global rating agency committed to provide value beyond the rating through independent and prospective credit opinions, research and data. Offering a world of knowledge and experience behind every opinion, we transform information to deliver meaning and utility to investors, issuers and other market participants. Fitch Ratings' global expertise draws on local market knowledge and spans the fixed-income universe. The additional context, perspective and insights we provide help investors make important credit judgments with confidence.
CRISIL is India's leading ratings agency. CRISIL is also the foremost provider of high-end research to the world's largest banks and leading corporations. With sustainable competitive advantage arising from its strong brand, unmatched credibility, and market leadership across businesses, and large customer base, it delivers analysis, opinions, and solutions that make markets function better. CRISIL's majority shareholder is Standard and Poor's. Standard & Poor's, a part of The McGraw-Hill Companies, is the w o r l d ' s f o r e m o s t p r o v i d e r o f c r e d i t r a t i n g s .
2. Investment Information and Credit Rating Agency (ICRA):
CREDIT RATING AGENCIES- INDIA AND AROUND THE WORLD
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Investors may utilize information from a single agency or from multiple rating agencies. Investors expect credit rating agencies to provide objective information based on sound analytical methods and accurate statistical measurements. Investors also expect issuers of securities to comply with rules and regulations set forth with rules and regulations set forth by governing bodies, in the same respect that credit rating agencies comply with reporting procedures developed by securities industry governing agencies. Understanding the history and evolution of the ratings agencies gives investors insight on the methodology that agencies use, as well as the quality of ratings from each agency. The analyses and assessments provided by various credit rating agencies provide investors with information and insight that facilitates their ability to examine and understand the risks and opportunities associated with various investment environments. With this insight, investors can make informed decisions as to countries, industries and classes of securities in which they choose to invest.
Sikha RathiMIB 2011-13
FINANCE QUIZ
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1. Treasury Debt accounts for how much parentage of world's supply of AAA rated Debt
securities?
2. A company that issues credit scores for individual credit-worthiness is called?
3. Which Indian bank has won the CRISIL's Real Estate Award in 2010, for outstanding
contribution to real estate sector through strong growth in home loans?
4. According to S&P's latest ratings, which two countries share the same rating as that of
US?
5. The only credit rating agency of India that is listed on the Bombay Stock Exchange is?
6. Identify the person-
He is the chairman of one of the India's largest engineering and Infrastructure
Conglomerate
Not from IIT's or Harvard like institutes, but has spent maximum part of his schooling in
village and then graduated from an Engineering college in Gujarat
His company is going to be divided into 9 parts, which are its core businesses by
Recently the company has come out with an IPO for one of its group company
7. Name the India's largest mutual equity fund by Assets under management.
8. Name the company which has emerged as the world's largest auto maker so far in 2011,
by defeating Toyota in sales.
9. Wockhardt, the pharmaceutical company recently has announced to sell its nutrition
business to which company?
10. Global PE majors are looking to buy out a majority stake in one of India's financial
services firm, which is a part of a conglomerate. Name the firm
11. Which was India's first insurer to introduce an online insurance plan in October 2009?
12. In the recent quarter which two companies have defeated Nokia and have emerged to
be the biggest smartphone makers?
13. India's Cox and Kings Ltd. has recently signed an agreement to buy which overseas
company for what is till date largest overseas acquisition by any Indian travel company?
***Answers in the end
CEO CORNER
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From Rags to Riches – The story of Mr. G. M. RaoDestiny is not a matter of chance; it is a matter of choice. It is not a thing to be waited for; it is a thing to be achieved.” Said noted W J Brian, This holds true for Indian Entrepreneur and self made billionaire Mr. Grandhi Mallikarjun Rao, founding Chairman, GMR group, India's leading Infrastructure Company.Mr. G M Rao – is a story of staunch resilience and hard work – a young man who failed his 10th standard exam and sat with his father supporting him in his gold business before cajoling him to send him to school again only to secure first division two years later. A man who rode on his bicycle in the by lanes of Rajam in 1978, It was a tough decision to leave the comfort of a government job to enter business in times when Red tapism was in its peak soon after emergency in 1978. An engineer turned industrialist, he began his business in 1978, with a single Jute Mill located in his hometown Rajam, in Srikakulam district. Within a few years, he diversified his business interests into Sugar, Ferroalloys, Banking, IT and most significantly, Infrastructure. Today, GMR Group is a leading infrastructure development company with business verticals in Energy, Roads and Airports. Today GMR's run airports are success of Public Private Partnership (PPP) model. Inspired by a vision to build entrepreneurial organisations that make a difference to society through creation of value, G M Rao established GMR Varalakshmi Foundation – the Corporate Social Responsibility arm of GMR Group. The worth of the GMR group has been estimated at 3.2 Billion US$ by Forbes.Mr. Rao has been felicitated with many awards such as 'Entrepreneur of the year' at the Economic Times Awards for Corporate Excellence 2006 – 07 in recognition of his exemplary entrepreneurial spirit and potential in breaking into the big league of top infrastructure organisations in India. He has also been awarded the `Most Promising Entrant to the Big League' by CNBC TV18 at its `Indian Business Leader Awards 2007'. On 12th March, 2009, he received the Infrastructure Person (Infra Person) of the year award at the Infrastructure Journal Award Ceremony held in London. Mr.Rao is also the recipient of the Sir. M. Visveswaraiah Award - 2008' instituted by the Federation of Karnataka Chamber Of Commerce and Industry (FKCCI) and the 'Most Inspiring Entrepreneur of the Year – 2008' award by National Institute of Industrial Engineering (NITIE), Mumbai. He received the award for the 'First Generation Entrepreneur of the Year' at the CNBC TV18 India Business Leader Awards 2009. From being director of the ING Vysya bank to the chairman of GMR group, the spirit of achievement and leadership inspires many and we at Finshastra hope that you'd feel be inspired too - by the story of this 61 year old humble entrepreneur.
NEWS
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S&P Has Cut the U.S. Credit Rating
S&P Analysis Was Flawed by $2 Trillion Error, Treasury Says
Asia, Europe Set to Stick It Out With U.S. Debt after S&P Cut
Euro-Area Central Banks to Hold Crisis Call as Risk Rises
Standard & Poor's downgraded the U.S.'s AAA credit rating to AA+ for the first time, slamming the nation's political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits. Lawmakers agreed on Aug. 2 to raise the nation's $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. The rating may be further cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.
Standard & Poor's decision to downgrade the U.S. credit rating was flawed by a $2 trillion error, according to a Treasury Department spokesman. The ratings firm erred in estimating discretionary spending levels at $2 trillion higher than Congressional Budget Office estimates. S&P, in a statement, disputed the Treasury's assertions and said using the department's approach to the CBO figures didn't affect the ratings decision. S&P said, “The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.”
Asian states and Russia are likely to retain their U.S. Treasury holdings after Standard & Poor's cut the U.S.'s sovereign credit rating to AA+ as European governments expressed confidence in the world's largest economy. Russia said the one-step cut “can be ignored.” South Korean officials put the downgrade on the agenda of an emergency meeting on global turmoil tomorrow. China's official Xinhua News Agency said in a commentary the U.S. must cure its “addiction” to borrowing. With Europe battling its debt crisis, France joined the U.S. in questioning S&P's reasoning. The central bank of Saudi Arabia, one of the oil exporting nations that together are the fourth-biggest holders of U.S. government debt, didn't respond to questions.
Euro-region central bank governors will hold emergency talks tomorrow aimed at stopping Spain and Italy from becoming the next victims of the sovereign debt crisis and limiting the market fallout from the first U.S. rating downgrade in history. Italian and Spanish bond yields rose relative to benchmark German bunds for a second week. Ten-year borrowing rates for both nations reached the most since before the euro was introduced in 1999. The U.S. rating cut may prompt further flows of funds into German government bonds.
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NEWS
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Payrolls Rose More Than Forecast in July as Unemployment Fell
Italy to Speed Up Austerity Measures, Seek Balance in 2013
Market likely to swing wildly when trading resumes on Monday
India expected to be among top three economies: Pranab
IT will be badly hit if US slips into recession again
SBI hints at upto 50 basis points interest rate hike next week
American employers added more jobs than forecast in July and the unemployment rate fell for the first time in four months, easing concern that the world's largest economy was sliding into a recession. Payrolls rose by 117,000 workers after a 46,000 increase in June that was larger than earlier estimated, the Labor Department said yesterday in Washington The economy needs to generate faster job growth to spur consumer spending, which makes up 70 percent of the economy and rose last quarter at the slowest pace in two years.
The Italian government will adopt a balanced-budget amendment, liberalize its labor market, and speed asset sales in order to accelerate austerity measures and restore investor confidence in its debt. Prime Minister Silvio Berlusconi said the government now won't wait until 2013-2014 to eliminate tax loopholes and deductions worth 25 billion euros ($36 billion), though he didn't say when they would be enacted.
National News
The Indian stock market is likely to witness heavy bouts of volatility when it resumes trading on Monday due to downgrading of sovereign credit rating of the US by the Standard & Poor's, experts said on Saturday. Giving a different view, some experts said that the situation might prove to be a boon for Indian markets in the long-term, as India is fundamentally stronger among its peers and attracts more international inward financial flows. Besides, the strengthening of the Indian currency against the US dollar will help act as a trigger.
Union Finance Minister Pranab Mukherjee on Saturday said that India is the second fastest-growing large economy in the world, and is widely expected to be among the top three economies in the next two decades. Union Finance Minister Pranab Mukherjee on Saturday said that India is the second fastest-growing large economy in the world, and is widely expected to be among the top three economies in the next two decades.
A turbulent US market means trouble for the Indian outsourcing sector, for which the US market accounts for close to 60% of revenues. It will put pressure on the top lines of companies as clients postpone investments and renegotiate contracts to cut cost. But industry bigwigs say it's too early to make any predictions.
Country's largest lender State Bank of India (SBI) today indicated it could hike interest rates by up to 50 basis points next week. Banks have been raising interest rates following a hefty 50 basis points increase in key policy rates undertaken by RBI in its first quarterly review of monetary policy last month to tame inflation. Since then about two dozen banks have already raised interest rates following July 26 policy rate hike by the apex bank.
Contributed by Vaibhav Gupta MIB 2011-13and Ankit Singh 2010-12
ANSWERS TO THE QUIZ
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1. 55%2. Credit Bureau in US, Consumer Credit Reporting Agency in UK3. SBI4. Belgium & New Zealand. Both have AA+5. CRISIL6. A.M. Naik of L&T7. HDFC Top 2008. General Motors9. Danone10. Future Capital Holdings of Future Group11. Aegon Religare12. Apple Inc. and Samsung13. UK's Holidaybreak, for Euro 312 Million
Contributed by Abhishek GMIB 2011-13
