INTERNSHIP PROJECT REPORT
ON
MARKETING OF BANK LOAN RATING FOR FITCH RATINGS IN
CONSTRUCTION AND INFRASTRUCTURE SECTOR IN HYDERABAD
BY
RIA VERMA
ID No. 1011041
DONE AT
Hyderabad
Project report is submitted in partial fulfillment of the requirements of
PGDM program of IMT Hyderabad.
SUBMITTED TO
Dr. Malleswari Bondada Mr Suryanarayan Mangina
(Faculty Guide) (Company Guide)
DATE OF SUBMISSION
(31st MAY 2012)
ACKNOWLEDGEMENT:
This project is as much about the people instrumental in the making of it as much as
it is about the project itself. Hence I would like to take this opportunity to thank all
those who helped me in the successful completion of my Summer Internship
Program (SIP).
First, I would like to thank Mr. Suryanarayana Mangina, the Regional Head, Fitch
Ratings Hyderabad who is also my Company Guide. He has supported me
throughout my project with his patience and encouragement. Rewarding all my
efforts while also pushing me to achieve more, he has been a very good mentor and
a supervisor.
Then I am thankful to Mr Jitendra for helping me in all the day to day work and
guiding me in all the problems which I had put in front of him. He supported like an
elder brother. I am also thankful to Miss Soumya for being there whenever I needed
any help.
I would also like to thank Dr. Malleswari Bondada, Prof. IMT Hyderabad and my
Faculty Guide for offering me much needed advice and insight throughout my
Internship. She offered an experienced ear for my doubts, because of which I have
been able to learn a lot.
In the course of my Internship at Fitch, I have been able to learn from a lot of Senior
Officials placed in various banks and large and mid-corporate companies. My
conversations with them have only helped improve my project. Therefore, I am
thankful to all the Bankers and Issuers
The entirety of my project has been completed using the resources provided to me
by Fitch Ratings for which I am extremely grateful to the Management.
Lastly, I would like to thank my parents for supporting me through my internship
process and providing me with everything I could possibly want.
RIA VERMA
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To Whomsoever It May Concern
31st May 2012
This is to certify that Miss Ria Verma, Enrollment No. 1011041 has worked on the
project titled “MARKETING OF BANK LOAN RATING OF FITCH RATINGS IN
CONSTRUCTION AND INFRASTRUCTURE SECTOR IN HYDERABAD” for 14
weeks at FITCH RATINGS, HYDERABAD as a part of her Internship Program.
The project is complete in all the respects. We are satisfied with the performance of
the student during the internship program.
Mr Suryanarayan Mangina
Director
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TABLE OF CONTENTS
ACKNOWLEDGEMENT……………………………………………………………….…..2
CERTIFICATE………………………………………………………………………………3
ABSTRACT………………………………………………………………………………….5
1.1 PURPOSE OF THE PROJECT………………………………….………………….6
1.2 OBJECTIVES OF THE PROJECT…………………………………….……………6
1.3 SCOPE OF THE PROJECT…………………………………………………………7
1.4 LITERATURE REVIEW…………………………………………………………........8
1.5 METHODS OF COLLECTING DATA………………………………………….…..19
1.6 LIMITATIONS OF THE RESEARCH………………………………………...……19
1.7 FACTORS CONSIDERED………………………………………..…….................20
1.8 METHODOLOGY………………………………………….……………...…...........21
1.9 ANALYSIS OF CONSTRUCTION SECTOR………………………………..…....31
1.10 ANALYSIS OF INFRASTRUCTURE SECTOR…………………………………..35
1.11 RECOMMENDATIONS …………………………………………………..……..…38
1.12 DESIGN OF FITCH LOGO …………………………………………………….….39
1.13 COMPARISON BETWEEN CREDIT RATING AGENCIES………………...….40
1.14 DETAILS ON CREDIT PROJECT……………………………………………..….46
1.15 ANNEXURE…………………….……………………………………………...……55
1.16 REFERENCES………………………………………………………………..…….60
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ABSTRACT
The SIP started with two weeks of training in which we were enlightened about the
working of credit rating agencies. Once the Mock interviews and Mock Meetings
were successfully completed then I met a lot of Issuers and Bankers. To issuers the
purpose was to explain about Fitch ratings, Advantages of getting the rating done
from Fitch rating, followed by sending of Offer letter, followed by Agreement signing,
Collection of Information and handing over the case to Analyst Team. Main aim of
meeting the bankers was to get the list of unrated companies which we could target.
I also used to get the feedback form filled from them on the basis of which I have
done the content analysis. Then all the other credit rating agencies were visited by
me, based on which I analyzed the differences in their working. I also got to work on
a Credit analysis project where my role was just of data mining of financial
information of various companies. For the Business Development of the company I
got in touch with around 80 corporate accounts through tele-calling. I visited around
30 companies/ issuers, sent profiles to 25 companies and visited around 35 Banks.
Then analysis of Construction and Infrastructure sector is also done by me.
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1.1 PURPOSE OF THE PROJECT:
My project on Business Development is being undertaken to increase the visibility of
Fitch Ratings in Hyderabad by targeting mid and large-corporate clients and to
create awareness among the bankers of Fitch, its research and credit ratings. The
industries assigned to me are Construction and Infrastructure.
The requirement of Bank Loan Ratings and how corporate and bankers perceive
Fitch as an External Rating Agency is being studied through the feedback which we
are collecting from them. Also, the difference between a rating done by a Financial
Analyst and that done by a Credit Rating Agency will be studied to bring out the
importance of CRAs in the financial markets.
1.2 OBJECTIVES OF THE PROJECT:
The objective of my Business Development project is to increase the visibility of Fitch
Ratings in Hyderabad using various marketing techniques, especially in the Bank
Loan Ratings segment. The Bank Loan Rating segment has become very
competitive in India with the entry of many external rating agencies. Hence the big
players have a large share in the mid and large corporate sector and trying to poach
the clients of other Credit Rating Agencies is not an easy task. However, this is what
I am attempting to design various marketing strategies that can be used to target the
large corporate who are not currently clients of Fitch Ratings.
I will be doing the financial analysis on two companies already rated by Fitch to show
the comparison between a quantitative analysis done by a Financial Analyst and that
done by a Credit Rating Agency which would be both qualitative as well as
quantitative. This would only help further my argument that a credit rating is not just
about number crunching and that an Auditor or Financial Analyst cannot do the same
job done by a Credit Rating Agency as is the belief of a lot of mid-corporate who take
a rating only due to pressure from their bankers who in turn do not believe in the
rating and urge their clients to take it only because of the mandate given by RBI
which states that any bank limit, whether fund based or non-fund based over Rs. 5
crores has to be rated on its riskiness by an external rating agency, authorized by
RBI and SEBI.
Then I will be doing a content analysis on the responses of Bankers and Issuers to
find out what the opinion on credit risk assessment is from the point of view of a
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banker as well as that of an issuer. The entire story is not complete without both
party views. Hence, using audience content analysis, through interview method of
data collection, the various units of person and response which bring out different
patterns to the study will be analyzed.
1.3 SCOPE OF THE PROJECT:
The project is split into stages:
Stage I- Training: 27 th Feb 2012- 16 th March 2012 .
During this period, we were tutored about the BASEL II requirements which
made it necessary for Credit Rating Agencies to be formed;
A comparative study of the various rating agencies present in India and the
world over was done in order to be able to point out the advantages of Fitch
with respect to the other rating agencies.
The pre-requisites for the formation of a rating agency and the various
approvals to be got from banks and market governing bodies were also
discussed.
After the theory sessions, we were trained on public speaking as we would
have to meet with a number of clients and bankers and communicate to them
on a day to day basis. For this, mock calls, mock meetings and mock
interviews were arranged by the executives at Fitch.
Stage II-Meeting the Bankers: 19 th March 2012- 29 th April 2012
In the initial meeting I was accompanied by an executive so that I could gain
confidence and learn from the questioned posed by the bankers what their
general concerns were regarding ratings and how to tackle them.
My meetings with bankers helped me see the whole picture as the Issuers
side of the story was incomplete without the Bankers view.
Stage III-Tele-calling: 22 nd March 2012-29 th April 2012.
We were assigned a few corporate companies details in our respective
sectors.
Our job was to call these companies officials and explain them about the
product and thus fixing an appointment with them.
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My task was to visit the websites of the corporate assigned to me and using
the contact details mentioned there, send Fitch’s corporate profile to the
Finance Officials.
Calls were made to mid-corporate and large-corporate, profiles were sent to
all interested parties.
Stage IV- Meeting Issuers 30 th April 2012 – 25 th May 2012
Met the Concerned person in the company with whom appointment was fixed
prior to the visit.
Explained them everything about the Fitch Rating Process.
To complete the target, we started with cold calling also ie randomly visiting
the company without prior appointments with them.
1.4 LITERATURE REVIEW:
Credit Ratings-Meaning
Credit Rating is based on the history of borrowing and repayment as well as the
availability of assets and extent of liabilities. It provides individual and institutional
investors with information that assists them in determining whether issuers of debt
and fixed-income securities will be able to meet their obligations with respect to
those securities. Credit rating is a mechanism whereby an independent third party
makes an assessment, based on different sources of information on the credit quality
of the assessed.
Credit Rating Agency:
A Credit Rating Agency (CRA) is a company that assigns ratings for issuers of
certain types of debt obligations. They issue opinions on the creditworthiness of a
particular issuer or financial instrument. They are crucial to the functioning of
financial markets.
International Rating Agencies
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Fitch Ratings: John Knowles Fitch founded the Fitch Publishing Company in 1913.
Fitch then published financial statistics for use in the investment industry. In 1924,
Fitch introduced the AAA through D ratings which has become the basis for ratings
throughout the industry. Through a series of acquisitions and mergers, Fitch began
to develop operating subsidiaries specializing in enterprise risk management and
Fitch India came to being as one such subsidiary.
Standard & Poor’s: Henry Varnum Poor set up a publishing house that published
journals which served as the forerunner for security analysis. In 1941, Standard
Statistics which published ratings for Corporate Bonds, Sovereign Debt and
Municipal Bonds, merged with Poor’s publishing house to form Standard & Poor’s
Corporation. Standards & Poor’s has become best known by indexes such as S&P
500.
Moody’s Investors Service: John Moody and Company was a publishing company
set up in the 18th century. Their first publication “Moody’s Manual” in 1900 was a
national publication on basic statistics and general information about stocks and
bonds of various industries. By 1909, analytical information of the value of securities
was also published and John Moody decided to take the idea a step further. This led
to the formation of Moody’s Investors Services in 1914, which in the following 10
years provided ratings for nearly all Government Bond markets at that time. By 1970,
Moody’s began rating commercial papers and bank deposits, becoming the full-scale
rating agency that it is today.
Table 1-RATING SYMBOLS USED BY INTERNATIONAL RATING AGENCIES
Moody's S&P Fitch
Long-term Short-term Long-termShort-
termLong-term Short-term
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Aaa
P-1
AAA
A-1+
AAA
F1+Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+A-1
A+F1
A2 A A
A3P-2
A-A-2
A-F2
Baa1 BBB+ BBB+
Baa2P-3
BBBA-3
BBBF3
Baa3 BBB- BBB-
Ba1
Not prime
BB+
B
BB+
B
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B-
Caa1 CCC+
C CCC CCaa2 CCC
Caa3 CCC-
Ca CC
C
CD /
DDD/
Source: http://en.wikipedia.org/wiki/Credit_rating
Rating Agencies in India:
Except for Fitch Ratings, all the other Rating agencies in India have been set up as
joint-ventures with the International Rating Agencies.
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CRISIL: In India, credit ratings started with the setting up of The Credit Rating
Information Services of India (now CRISIL Limited) in 1987. CRISIL was promoted
by premier financial institutions like ICICI, HDFC, UTI, SBI, LIC and Asian
Development Bank. Now CRISIL is a Standard &Poor’s company with a majority
shareholding.
ICRA: Formerly known as Investment Information and Credit Rating Agency of India
Limited, it 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 Limited is a Public
Limited Company, with its shares listed on the Bombay Stock Exchange and the
National Stock Exchange. It was promoted mainly by IFCI and is now controlled by
Moody‘s.
CARE: Credit Analysis and Research Ltd. (CARE) was set up in April 1993. It was
promoted mainly by banks and Financial Institutions. The main shareholders of
CARE are- IDBI, Canara Bank and SBI. It is recognized by RBI, SEBI and the
Government of India.
Fitch Ratings: Fitch India a 100% subsidiary of Fitch International. Set up in India in
2001, it is a recognized Credit Rating Agency with RBI, SEBI and NHB.
ONICRA: Mr.Sonu L Mirchandani founded ONICRA in 1993. It is today an active
player in the Credit and Performance Assessment space, providing rating services to
individuals, corporate and MSMEs.
Brickworks: Brickwork Ratings is a Bangalore-based company incorporated in 2007
with the mission of providing unbiased information to Indian investors for making
better investment decisions. It is a SEBI licensed credit rating agency, founded by
bankers, credit rating professionals, former regulators as well as professors, is
committed to promoting Financial Literacy.
SMERA: SMERA is the country's first Rating agency that focuses primarily on the
Indian Micro, Small and Medium Enterprise (MSME) segment. It is a joint initiative by
SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and
several leading banks in the country.
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BASEL II NORMS:
The entire practice of Credit Rating Agencies today, stands on the three pillars of
BASEL II Norms. Basel II is a revised framework on Capital Adequacy by the Basel
Committee on the Banking and Supervision. Under this system assets on the
balance sheet, together with non-funded commitments and other similar exposures,
are assigned prescribed risk weights. Banks must maintain minimum capital funds
equal to a prescribed ratio of the aggregate risk weighted assets and exposures.
With a view to maintaining consistency and harmony with international standards,
RBI has decided that all commercial banks in India will adopt the Standardized
Approach for measuring credit risk under Basel II.
As per Basel II norms, external ratings may be applied in order to determine the
amount of capital required for all of a bank’s current exposures/claims (both funded
and non-funded) relating to the credit risk to which they are exposed.
RBI guidelines on Basel II norms require the banks, where they use external ratings,
to use recognized agencies such as Fitch Ratings to support the measurement of
credit risk. The ratings applied for this purpose in India need to be solicited by the
borrower.
Where a bank opts not to apply external ratings for an exposure to a borrower, it has
been prescribed that all fresh sanctions and renewals of unrated exposures in
excess of Rs.50 crore will attract a risk weighting of 150% from March 31, 2008 and
a similar risk weighting for all unrated exposures in excess of Rs.10 crore from
March 31, 2009. This means increased capital costs will apply to banks for many
entities which do not have their bank loans rated. In turn, this may lead to higher
borrowing costs, if these capital costs are passed on to the borrowers.
As per the BASEL II Accord, all Credit Rating Agencies rate debt instruments and
based on their rating, banks set aside the corresponding amount of capital. The
capital adequacy associated with each risk class is given below.
Table 2-LONG TERM RATING SYMBOLS USED BY FITCH RATINGS
LONG-TERM RATINGS SYMBOLS RISK WEIGHTS
AAA (ind) 20%
AA (ind) 30%
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A (ind) 50%
BBB (ind) 100%
BB (ind) & below 150%
Unrated* 100%
* Loans up to Rs.50 crores attract 100% risk weight whereas; those above Rs.50
crores attract 150%.
An illustration showing the benefits to banks in implementing BASEL II in comparison
to BASEL I Standards is given below.
Capital Saving Potential for a Bank on a loan of Rs.100 crores using BASELII
(Standardized Approach for credit risk)
As per BASEL I, keeping the capital gearing to be 9% for all risk classes, the capital
required to be set aside for Rs.1000 crores is Rs.90 crores.
Table 3-CAPITAL REQUIRED AS PER BASEL I NORMS
AS PER BASEL I NORMS
RATING RISK WEIGHT
CAPITAL REQUIRED*
(Rs. in crores)
AAA 100% 90
AA 100% 90
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A 100% 90
BBB 100% 90
BB and below 100% 90
Unrated 100% 90
As per BASEL II Norms, different risk classes attract different capital adequacy by
banks. Hence, the capital saving potential of banks by adopting BASEL II can be
seen below.
Table 4-CAPITAL SAVING POTENTIAL AS PER BASEL II NORMS
BASEL II (Standardized Approach for credit Risk)
RATING
RISK
WEIGHT
CAPITAL
REQUIRED*
CAPITAL SAVED (Rs. in
lakhs)
CAPITAL SAVED
(in %) **
AAA 20% 18 72 300
AA 30% 27 63 133.33
A 50% 45 45 0
BBB 100% 90 0 -100
BB and below 150% 135 -45 -243
Unrated 100% 90 0 -100
* Capital required=loan amount x risk weight x 9%
** Capital Saved (in %) = (C1-C0)/C0*100;
Where: C0Capital Required
C1Capital Saved
Using the formulae mentioned above, the amount of capital that can be saved by
banks on adoption of BASEL II norms for a loan of Rs.1000 crores has been
14
calculated and tabulated. This capital saving potential if utilized by all banks helps
increase the money multiplier function in the economy, thereby leading to more
funds being pumped into the financial system in the form of investment
Source:http://www.fitchindia.com/BLR_India_FINAL_low_res_Dec08.pdf
Table- 5 Long – Term Credit Ratings
Rating Scales Definitions
Fitch AAA Instruments with this rating are considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such instruments carry lowest
credit risk.
Fitch AA Instruments with this rating are considered to have high degree of safety
regarding timely servicing of financial obligations. Such instruments carry very
low credit risk.
Fitch A Instruments with this rating are considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such instruments carry low
credit risk.
Fitch BBB Instruments with this rating are considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such instruments carry low
credit risk.
Fitch BB Instruments with this rating are considered to have moderate risk of default
regarding timely servicing of financial obligations.
Fitch B Instruments with this rating are considered to have high risk of default regarding
timely servicing of financial obligations.
Fitch C Instruments with this rating are considered to have very high risk of default
regarding timely servicing of financial obligations.
Fitch D Instruments with this rating are in default or are expected to be in default soon.
Table-6 Short-Term Credit Ratings
Rating Scales Definitions
Fitch A1 Instruments with this rating are considered to have very strong
degree of safety regarding timely payment of financial obligations.
Such instruments carry lowest credit risk.
Fitch A2 Instruments with this rating are considered to have strong degree of
safety regarding timely payment of financial obligations. Such
15
instruments carry low credit risk.
Fitch A3 Instruments with this rating are considered to have minimal degree
of safety regarding timely payment of financial obligations. Such
instruments carry higher credit risk as compared to instruments
rated in the two higher categories.
Fitch A4 Instruments with this rating are considered to have minimal degree
of safety regarding timely payments of financial obligations. Such
instruments carry very high credit risk and are susceptible to
default.
Fitch D Instruments with this rating are in default or expected to be in
default on maturity.
** Fitch Ratings may apply “+” sign for ratings from “Fitch A1 to Fitch A4 to reflect
comparative standing within the category”.
SOURCE: FITCH BROCHURE
The Demand for and Supply of Credit Ratings:
Issuers of securities seek credit ratings to improve the marketability or of their
securities, or to satisfy investors, lenders, or counterparties who want to enhance
management responsibility.
The Cost and Benefits of obtaining a rating:
The primary purpose of obtaining a rating is to enhance access to private capital
markets and lower debt issuance and interest costs. Credit rating agencies, in their
role as information gatherers and processors, can reduce a firm's capital costs by
certifying its value in a market, thus solving or reducing the informative asymmetries
between purchasers and issuers.
Criticisms against Credit Rating Agencies:
Credit rating agencies (CRAs) play a key role in financial markets by helping to
reduce the informative asymmetry between lenders and investors, on one side, and
16
issuers on the other side, about the creditworthiness of companies or countries.
CRAs' role has expanded with financial globalization and has received an additional
boost from Basel II which incorporates the ratings of CRAs into the rules for setting
weights for credit risk. Ratings tend to be sticky, lagging markets, and overreact
when they do change. This overreaction may have aggravated financial crises in the
recent past, contributing to financial instability and cross-country contagion.
The recent bankruptcies of Enron, WorldCom, and Parmalat have prompted
legislative scrutiny of the agencies. Criticism has been especially directed towards
the high degree of concentration of the industry. Promotion of competition may
require policy action at national and international level to encourage the
establishment of new agencies and to channel business generated by new
regulatory requirements in their direction.
Accuracy and performance of ratings:
CRAs’ failure to predict the Mexican and Asian financial crises was due, among
other things, to the fact that contingent liability and international liquidity
considerations had not been taken into account by CRAs.
In making their ratings, CRAs analyze public and non-public financial and accounting
data as well as information about economic and political factors that may affect the
ability and willingness of a government or firms to meet their obligations in a timely
manner. However, CRAs lack transparency and do not provide clear information
about their methodologies.
FITCH’S BANK LOAN RATING PROCESS
17
Initiate Rating
Process
Perform pre-analysis &
request non-public
information, ifappropriate
Collect publicly
availableinformation
Prepare detailed
questionnaire
The above mentioned Rating process typically takes 6 to 8 weeks.
Source: FITCH BROCHURE
1.5 METHODS OF COLLECTING DATA AND THEIR SOURCES:
Data collection for this Business development project was done mainly through the
bank channel. Banks were approached and the industry outlook for 2012 was
presented to them and we also gave the introduction of Fitch India and its
products/offerings to them. The unrated lists of the companies were given to us by
the banks. These bankers also served as the respondents to my survey on the
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Hold meeting with entity
management & other
stakeholders
Hold Ratings
Committee
Draft Report
Perform in-depth
analysis
Assign Ratings, write
& publish commentary
Conduct ongoing
surveillance
reasons why a corporate approaches an external rating agency for a rating of their
debt instruments and their feedback on how Fitch India is doing as compared to its
competitors.
Primary data was collected from bankers through interview method and it was used
to do a content analysis on the requirement of an external rating agency to rate
financial instruments. Using interview method, issuers’ responses were also
recorded and an analysis of the various reasons why they take ratings for their debt
was found.
The analysis to prove the requirement of a rating agency instead of a third party
Financial Analyst was done using secondary data which were taken from published
sources like the company website, Economic Times website, newspapers, journals
and Fitch research papers.
1.6 LIMITATIONS OF THE RESEARCH -:
Following were the various limitations-:
Company officials and Bankers did not have much time to answer questions
that form a significant part of the project.
The benefits from our visits to all the nationalized banks in the city in the form
of leads generated by the said banks would arise in due course and by that
time we all will leave the company as our training will be over.
The data collected to show the need for an external rating agency to do the
rating is limited to what is available on public domains which are generally
quantitative data hence a qualitative study is bit difficult.
The content analysis conducted on the responses collected is not exhaustive.
1.7 FACTORS CONSIDERED:
Following were the factors considered for Business Development of Fitch in
Hyderabad -:
a) First of all to enquire whether the company is rated by any other rating
agency.
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b) Then enquiring about the bank loan and to check if it is above Rs.5 crore.
c) If they are an existing client of another Credit Rating Agency and asking if
they are willing to shift to Fitch at the time of annual surveillance.
d) Is the company planning any IPO in the near future
e) Are they willing to pay the fees for subscription to the rating
f) Does the company require foreign investment?-because Fitch’s international
presence helps corporate get foreign investment at lower rates.
The factors considered for Financial Analysis to show the requirement of an External
Rating Agency in obtaining a rating by a corporate were:
a) The corporate should be already rated by Fitch in order to allow comparison.
b) The financials of the company should be easily available from secondary
sources.
c) The corporate should have financials dating back at least five years for
comparison purposes.
d) All items of relevance like EBIDTA values, Non-cash Charges, Depreciation,
Profit after Tax, etc. should be given in the Profit and Loss and Balance Sheet
statements.
1.8 METHODOLOGY:
Business Development was done using various techniques like tele-calling,
sending corporate profiles, meeting with financial heads or senior financial officials to
explain them the benefits of obtaining a rating from Fitch, presenting them with an
industry outlook and a checklist of what is required in order for the rating to be
completed successfully. It is also done to negotiate the terms of rating like:
Time taken to do the rating; which is normally 4-5 weeks;
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Fees to be paid for the rating depend on the size of the loan but it can be
negotiated.
Full and truthful disclosure of the documents is required from the company
that wishes to get the rating. These documents include the financials-current
and projected, management track record, third party information, etc which
will be considered and audited thoroughly before the analytical team take
over.
Once the client is satisfied on the above terms, the company will send him an offer
letter and sign the mandate/agreement. By signing on that, the Business
development team is discharged of their obligations and the analytical team takes
over and thus my involvement in the process is over.
A consolidated report of the companies called, number of meetings attended and
leads generated by me till date have been given below-
The calls made to various corporate were done from a self made database compiled
from the competitors list of clients, unrated lists of companies given by banks and
financial advisory corporate.
The bankers met by me were mostly Branch Managers, Assistant General Managers
and Relationship Managers. Their responses formed the other side of the coin while
analyzing how credit ratings were viewed by bankers and issuers. Given below is a
consolidated report of the number of bankers met and the method of creating a
visibility for Fitch with them was done by handing over a CD containing industry
outlook for all sectors which contained a forecast for that particular industry for the
rest of the year and the Brochure of Fitch India. This was given in both hard and soft
copy formats to the credit and risk department in each of the nationalized banks
visited. In turn, the bankers gave their views on credit ratings and Fitch’s ratings in
21
ISSUER CALL REPORT
No: not interested 30
Co. with other rating agencies 55
No: with debt below Rs.5 cr. 10
TOTAL CALLS MADE 95
particular. Some bankers even gave us the unrated list of companies with them
which formed part of the leads generated by us.
CONSOLIDATED BANKERS MEETING REPORT
Bankers met 35
Fitch Corporate CDs Distributed 32
Fitch brochure Distributed 29
CONSOLIDATED LEADS GENERATED REPORT
Unrated List from Bankers 20
Leads generated from my database 8
Total leads generated 28
The reason behind the comparison was because many mid corporate felt that the job
of an external rating agency which took 4-5 weeks could be done by a financial
analyst in a matter of hours or a couple of days. My comparison shows that the
quality of the two credit measurements vary vastly and no doubt remains that the
qualitative analysis done by a credit rating agency is done with a better judgment of
the business and the industry in which the business is run.
Given below is a list of issuer meetings that materialized from the tele-calling and
profile sending stage. These senior officials placed in their respective mid and large
corporate were instrumental in my analysis through their responses.
S.No.
NAME OF THE
COMPANY
CONTACT
PERSON DESIGNATION VISITS
1 IJM (India) Infra Ltd
Mr. K
Venkateswara
Rao
Snr Manager-
Corporate
Finance 1
2
Sagi Sol Technology
Services Ltd.
Mr. Yeshwanth
Vepachadu
Vice President-
Business1
3
SIBY Mining & Infra Pvt
Ltd.
Mr. Siby M
LukoseMD 1
22
4Pyramid Softsol Pvt Ltd
Mr. Kishore
Nagalla
HR & Admin.
Manager1
5 Deepija Telecom Pvt Ltd Mr. Md Kaleem HR Manager 1
6 Ramboll India Pvt. Ltd. Mr Sreedhar
Reddy
Finance Manager 1
7 Hitech Telematix India
Pvt Ltd
Mr. Srinivas
RajuMD 1
8Visu International Ltd Mr. Sreedhar
Accounts
Manager1
9 PES Engineer Ltd Mr. Vijay Kumar GM 1
10 Ramky Infra Ltd Mr. Sreehari DGM 1
11Vijay Electricals Ltd
Mr. Sreedhar
RaoFinance Manager 1
12 Edelweiss Ms M Prasanna
Lakshmi
Exec Admin &
Estates
1
13 Pranav Construction
Systems Pvt Ltd
Mr Vijay
Gadipelli
Sales Coordinator 1
14 Alengers Medical
Systems Pvt Ltd
Mr Elia 1
15 Sujana Grp Of
Companies
Mr S Sambasiva
Rao
AGM Corp
Finance
1
16 Subhagruha Projects
India pvt ltd
Mr Prasad 1
17 Alexandria Ms Ganga Devi Consultant 1
18 SREI Equipment Finance
Pvt Ltd
Mr M Damodar
Reddy
Manager(Account
s & Admin)
1
19
Krebs Biochemicals &
Industries Ltd
Mr
Satyanarayana
Kumar 1
20 PLR Infra Prjcts Ltd Mr
Laxminarayana
Manager-
Accounts
1
21 Enersies Astra Pvt Ltd Mr Tinku Punjabi Dpty Manager- 1
23
Finance
22 Imery’s Ceramic India Ltd Mr. V.V. Sairam
Manager-Fin. &
Accts. 1
23
Parsavnath Developers
Ltd.
Mr. K.
Dhananjaya
Secretary to VP
(South) 1
24
TATA Advanced Systems
Limited Mr AVS Prasad CFO 1
25
Central Power
Distribution Co. Of AP Mr Puroshotam GM 1
26
Sri Surya Educational
Society
Mr
Ramachandra
Accounts
Manager 1
27 Andhra Polymers Pvt Ltd P Sai Sreenivas PA to MD 1
28 7 Seas Entertainment ltd BS Venu Mallik Finance Manager 1
29 Amira Foods ltd
Praveen
Nagamalla GM – Mkt Devt 1
TOTAL MEETINGS WITH ISSUERS 29
The method of working of a credit rating agency though long, is thorough and almost
accurate in comparison to that of a financial analyst.
A sample of the feedback given by Bankers and Issuers to my questions of why
corporate obtains ratings and their views on credit ratings is given below.
NAME OF
BANKER/ISSUERDESIGNATION RESPONSES
Mr. K Raghunath
Associate Client Mgmt-
Global Banking, HSBC
Bank
Only nationalized banks follow
RBI norms and urge their
customers to get ratings on
their loans. HSBC does not
encourage
Mrs. NirmalaBranch manager,
Central Bank of India
BLRs r just starting to mean
something to the corporate.
24
Although it’s not being done
seriously by the CRAs.
Mr. Y subba raoChief Manager-Credit,
Andhra Bank.
Fitch gives good ratings only to
govt companies.
Mr. Mr Giriya Naik. BChief manager, State
Bank Of Mysore
Corporate take ratings only due
to RBI regulations. SMEs will
decide to get their loans rated
only if penalty is imposed.
Feels CRISIL has a better
research team.
Mr. K. Muruganandan AGM, Bank Of India
Will take time for corporate and
investors to regain trust in
ratings after the financial
meltdown.
Mr. PradhanAdvances Manager,
SBH
The general opinion of
corporate about CRAs is that
they do not try to understand
their business before giving a
rating. Hence the rating is not
really a performance measure.
It’s the result of a quantitative
analysis alone which can be
done even by a CA.
Mr. Yeshwanth
Vepachadu
Vice President-
Business, Sagi Sol
Technology Services
Ltd.
Have never heard of any
CRAs. Fitch is the 1st. If I take
a rating, it would be for the
interest rate benefit.
Mr Puroshotam GM-Central Power
Distribution Co. Of AP
Banks requires a rating for the
loan since its above 10 crore.
We also do project finance for
which high credit limits r reqd.
hence require rating.Is with
25
ICRA and is satisfied with their
rating methodology.
Mr. Srinivas RajuMD, Hitech Telematix
India Pvt Ltd
Require a quick assessment as
banks r pressurizing for a
rating. Though Fitch was not
recommended by banker.
Mr. Praveen
Nagamalla
GM – Mkt Devt, Amira
Foods ltd
Require rating because a good
rating will help get
clients/customers/suppliers
easily when we commence
operations.
Mr. AVS Prasad
CFO, TATA Advanced
Systems Limited
Taking this rating only because
of bank norms. Was with
CRISIL earlier. Didn't get a
good rating hence decided to
try Fitch.
Mr. Md KaleemManager, Deepija
Telecom Pvt Ltd
Wanted to learn more about
credit ratings. Do not have a
loan above 5 cr. Presently but
will require soon due to
expansion plans.
Mr. Nagbhushan CFO, KLR Industries
Is with ICRA. Find fees high,
rating takes a long time but find
Fitch’s ratings trustworthy. Will
take next time from Fitch.
Mr. K Venkateswara
Rao
Snr Manager- Corporate
Finance, IJM (India)
Infra Ltd
Co. having a loan but as of now
they are into huge losses, will
get the rating done once the
performance improves
The list of Companies to which Fitch Profile was sent
Sno. Company Name Person Designation
26
1 Novo Agritech Ltd J raghunath rao Chairman
2 Naidu Motors Ajay Naidu CMD
3 Nano Bud Technologies rajanikanth MD
4 Kavya Projects Pvt Ltd Prathap Kumar GM
5 Misk Technologies Pvt Ltd Mohd Ekram Ali CEO
6 Karan Woo-Sin Ltd Anil Agarwal Director
7 KSK Energy Ventures Ltd Mr Srikanth Kishore
Exec. Finance
manager
8 Phoenix Infratech Pvt Ltd Mr Suresh Chairman
9 Vision Ventures Ltd Mr G China Babu GM
10 Object Technologies Solutions
Ltd
Raju Bollu Director
11 Novu Agritech ltd Ragunath Rao Chairman
12 Lahari Power & steels Ltd K Satyanarayan Director
13 OM Shiva Shakti Iron Industries Jitender Kumar Kedia
MD
14 Gowra Petrochem Pvt ltd Gowra Srinivas MD
15 Pragati Green Meadows & resorts pvt Ltd
GBK Rao Chairman
16 IVY comptech Pvt ltd Anil Kumar
27
17 Panacea Medical Technologies Pvt Ltd
Mr Raman Director
18 Sree Lakshmi Metal Industries & Construction
MNR Shastri Accountant
19 Nikhil refinance Mr. Srinivas
20 Binjusaria ispat ltd. Mr. nandkishore
The various steps followed by a credit rating agency while applying a rating to a
corporate is given below:
28
Source: http://www.fitchindia.com/BLR_India_FINAL_low_res_Dec08.pdf
For rating corporate borrowers, Fitch Ratings would typically apply its corporate
rating methodology as used for rating bonds and other capital market instruments.
a. Qualitative Analysis: Covers Industry Risk, Operating Environment, Market
Position, Management, Accounting and Corporate Governance.
b. Quantitative Analysis: Covers Earnings and Cash Flow, Capital Structure and
Financial Flexibility.
c. Earning Measures: Analysis of FFO, EBITDAR, After Tax Cash Flows, Net Free
Cash Flows, Coverage Ratios (FFO/Gross Interest Expense, FCF/Capital
Expenditure).
d. Leverage Measures: Debt/EBITDA (Cash Leverage), Net Debt/Equity (Gearing).
29
e. Profitability Measures: Analyses EBITDA/Operating Income and Return on
Equity/Return on Capital Employed.
The following is the no. of items required from issuer by the credit rating team to start
with the rating process:-
ANALYSIS OF CONSTRUCTION AND INFRASTRUCTURE SECTORS IN INDIA
30
As I was allotted to do marketing of Bank Loan Ratings in Construction and
Infrastructure Sectors, in this section I have done analysis of the two sectors
performance in India.
1.9 ANALYSIS OF CONSTRUCTION SECTOR
Fitch Ratings expects the credit profile of this sector to be stable in 2012. There are
various factors which are taken into consideration to give outlook ie some trigger
points are also there which affect the viewpoint the most.
Construction Industry in India can be categorized in the following -:
Residential, industrial, commercial, and other buildings.
Sewers, roads, highways, bridges, tunnels, and other projects.
Specialized activities such as carpentry, painting, plumbing, and electrical
work.
Outlook for Indian construction industry -:
Expected growth of wage and salary jobs in the construction industry will be
about 15 percent through the year 2012.
The demand for residential construction is expected to continue to grow.
Construction of nursing homes, Old Age homes, and other extended care
institutions also will increase due to aging population.
Employment in heavy and civil engineering construction is projected to
increase
Due to increase in highway, bridge, and street construction
FACTORS CONSIDERED TO GIVE THE OUTLOOK IN CONSTRUCTION
SECTOR
Fitch expects the build-operate-transfer (BOT) portfolio to grow and companies will
have to invest substantial equity into these infrastructure projects for execution.
1) Order Inflows- It is the no. of orders to construct something, which construction
companies will get. Fitch expects order inflows to slow down and order books to
remain stagnant in 2012. While order inflows from the industrial sector are expected
31
to weaken as corporate sector capex plans are deferred amid slowing GDP growth,
order inflows from the transportation sector and other infrastructure segments
(except power) are expected to remain buoyant.
2) Ability to Raise Equity: Construction companies need a huge amount of funds to
finance its raw material and go ahead with the construction process. But Fitch feels
that the construction companies are faced with a lack of interest in the IPO market,
various companies raised funds from private equity investors at the parent or
intermediate holding company level for investments in BOT projects during 2011. But
continuing volatility in stock markets and weakening economic conditions may
hamper plans to raise funds. Alternatively, funding of such investments through debt
at the parent level would put pressure on their ratings in the medium term.
3) Interest Rates: It is the rate at which the companies raise loan from banks or
financial institutions. But the increase in interest rates in India due to Inflation has led
to a deterioration of debt coverage ratios for construction companies. The higher
interest rates may also lead to an increase in the cost of BOT/BOOT projects and
hurt their ability to service debts upon operation which could mean their holding
entities (sponsors) are required to give greater support to the companies otherwise
they can face a lot of problem in future.
4) Execution Challenges: The tasks of construction companies are pretty
challenging. So companies which rely on sub-contractors for the execution of their
projects may experience difficulties. As sub-contractors themselves are facing
challenges in managing their working capital, due to the contraction in bank funding
which is not a good news for the construction companies.
5) EBITDA Margins: The rating depends mostly on the financial performance of the
companies. So Fitch expects the EBITDA margins of most companies in this sector
to be stable. However, Fitch also feels that those companies with a higher proportion
of fixed price engineering procurement and construction (EPC) contracts may see a
contraction in margins if there is a substantial movement in material prices. Those
32
companies which had bid for projects aggressively in the past may also see a fall in
margins.
6) Working Capital: It is the fund required to carry on the day to day activities of the
company. The working capital position of most Fitch-rated companies was stable
during 2011 and is expected to remain stable in 2012. However, smaller sub-
contractors may face liquidity pressures due to a contraction in bank funding.
TRIGGER POINTS IN CONSTRUCTION SECTOR
Fitch has given STABLE outlook based on the past performance of all the
companies in the sector together. But this outlook can be changed on the basis of
some points which are -:
1) Inability to Raise Funds: Fitch feels the outlook could be revised to negative
during the year in the event of a higher-than-expected slowdown in order inflows and
an inability to fund investments in BOT/BOOT projects through equity injections.
2) No Positive Change overall: Fitch does not expect a positive change to the
outlook during the year. Positive rating actions, if any, would be driven by individual
credit profiles ie if the companies will go for rating, it could be positive also based on
their performance rather than the performance of the sector.
SWOT Analysis of Construction Industries in India
Strengths
There are ample employment and training opportunities in the field of
construction.
There is private sector housing boom and commercial building demands
Multi building projects are being constructed on the feasible locations in the
country.
Availability of low cost well- educated and skilled labour force in the country.
33
There is sufficient availability of raw material and natural resources in the
country.
Weakness
Distance between construction projects reduces business efficiency.
Changing skills requirements and an ageing workforce may emphasize the
skills gap.
Improvement in long-term career prospects is highly required to encourage
staff retention and new entrants.
There is difficulty in external allocation of large contracts.
There are lack of clearly defined processes and procedures for construction
and its management.
Huge amount of money needs to be invested in this industry
Opportunities
Continuous private sector housing boom will create more construction
opportunities.
Public sector projects through Public Private Partnerships will bring further
opportunities.
Opportunities offered by renewable energy projects to develop skills and
capacity in new markets.
Availability of more flexible training delivery techniques
Financial supports like loan and insurance and growth in income of people is
in support of construction industry
Threats
Current economic situation may have an adverse impact on construction
industry
Political and security conditions in the region are always threats to any
industry in India.
Infrastructure safety is a challenging task in construction industry.
Lack of political willingness and support on promoting new strategies.
Natural abnormal casualties such as earth quake and floods are uncertain
and can prevent the construction boom.
34
There is stiff competition in the industry.
1.10 ANALYSIS OF INFRASTRUCTURE SECTOR
Fitch Ratings has given overall Negative outlook to infrastructure sector.
Infrastructure sector can be sub- divided into the following
Toll roads
Airports
Thermal Power Projects
Biomass Power
Summary of 2012 Sub-Sector Outlooks
Sector 2010 2011 2012
Toll roads Stable Stable Stable to
Negative
Airports Stable Stable Stable to
Negative
Thermal
power
projects
Stable Stable Negative
Biomass
power
Stable Negative
FACTORS CONSIDERED TO GIVE THE OUTLOOK IN INFRASTRUCTURE
SECTOR
35
1) Availability of fuel- The power project subsector is most exposed to fuel
shortages and low credit quality among customers. Many projects approaching
commercial operations date (COD) could be stranded due to lack of fuel.
2) Counterparties Involved- Deteriorating finances among state-owned off-taker
utilities will pose greater risks for projects with high generation costs.
3) Toll road exposures - Toll roads that enter the ramp-up phase in a prolonged
slowdown could be negatively affected, as in the 2008-2009 global financial crises,
when GDP growth was still 7%. Because most projects suffer from poor initial
demand forecasts, external shocks tend to magnify traffic risk. Roads dependent on
international trade such as port connections, or serving industries catering to export
markets could suffer from lower patronage.
4) Interest Rates - Most projects are bank funded, with floating rates. Interest rates
have risen sharply. The increased cost is beginning to affect projects structured with
thin financial margins. If rates remain high, weaker projects’ ability to cover debt
service from project cash flows without sponsor support will be impaired.
TRIGGER POINTS IN INFRASTRUCTURE SECTOR
1) Policy Initiatives- If issues pertaining to land acquisition, permitting and systemic
fuel shortages are addressed through committed and forceful policy action,
completion and operations risks may be mitigated, enabling projects to stabilize their
credit profiles. Softening interest rates could provide relief to stressed cash flows.
2) Interest Rates- At present the interest rates are pretty high. But Softening interest
rates could provide relief to stressed cash flows of the companies in this sector.
SWOT Analysis of Infrastructure Industry in India
Strengths
36
There is decline in Merchant Power Prices
State Government Policy on Tariffs – Govt set up low tariffs for few power
companies.
Weakness
Weak cash flows in the companies.
Completion Risk – Very few projects are completed on the deadline.
Stringent processes involved in the infrastructure sector
Fuel constraints- Domestic coal availability, primarily dependent on the
dominant government producer, is unlikely to be able to feed all the new
projects.
High oil prices in combination with a falling currency have severely affected
airline operators’ financial positions.
Opportunities
People want to go for non renewable sources of energy like biomass which is
available at lower cost
Population is increasing for which more and more infrastructure development
is needed in the country
Threats
Environmental effects - the adverse effect on the environment is the biggest
threat
Weakening Off-Taker Credit Quality- A worsening of the financial position of a
number of state government-owned electric utilities has increased the off-take
counterparty risk for a few projects.
Revenue Risk - Roads carrying a greater proportion of commercial vehicles
are likely to be more susceptible than others to an economic slowdown
Weak Counterparties: Deteriorating finances among state-owned off-taker
utilities will pose greater risks for projects with high generation costs.
Recession Risk for Airports: Declining global economic activity and a
potential recession in developed economies could adversely affect airport
traffic
37
High Interest Rates Risk: The increased cost is beginning to affect projects
structured with thin financial margins.
1.11 RECOMMENDATIONS:
From the various incidents mentioned by issuers about the rating process
taking more than its assigned average of 4 weeks, I c
The strategy of Fitch needs to undergo a change in order to increase the
customer base as the Indian customer is highly price sensitive.
Fitch needs to hire few people in the BRM team as only 2 people are not
sufficient to take care of the entire operations in the region.
The prices of Fitch is too high in comparison to other CRA’s
As Banks mostly do not recommend Fitch to their customers, Fitch needs to
develop good relation with all the banks in the city and not only few banks like
Andhra Bank and SBH ( which are its focus presently )
Coordination between BRM team and Credit team is bit lagging which could
be quite annoying to the issuers, so Fitch needs to work on that.
Very few companies are aware about Fitch, so Fitch BRM team needs to
meet them frequently to build relationship with them.
1.12 LOGOS DESIGNED FOR FITCH RATINGS
As Fitch ratings does not have any logo as of now, I have designed few logos for the
company.
38
The arrows in FR indicate that the Rating provided by Fitch is up to the mark based
on financial performance and is free from all the biases.
1.13 Comparison between Credit Rating Agencies – CRISIL, ICRA,
CARE & FITCH.
39
Objective: To know the difference in the working of the Credit Rating Agencies –
CRISIL, ICRA, CARE and FITCH.
Methodology:
Visited all these other rating agencies to know their details
From their respective websites.
From the Bankers which we visited
From the proposals which we got from these companies as a prospective
clients.
Findings:
It is a global analytical company providing ratings, research, and risk and policy
advisory services. It is India's leading ratings agency. It is also the foremost provider
of high-end research to the world's largest banks and leading corporations. Its
majority shareholder is Standard & Poor's, a part of The McGraw-Hill Companies, is
the world's foremost provider of credit ratings.
No. Of Companies rated In AP is 1000.
Time taken to complete the rating process is 3 weeks.
Items in their checklist are 5.
CRISIL has tie up with certain banks, which provide lists of clients only to
them. Like Federal Bank.
No. Of people in the credit team is around 30-35.
40
Market share of CRISIL is 39% approx.
Products being rated -:
1) Credit Ratings -
i) Bonds/ LT instruments ii) CPs/ ST instruments
iii) PTCs/ SF instruments iv) Bank Loan Ratings (Basel II)
2) SME Ratings Real Estate Ratings
3) Business School Grading 4)Broker Quality Grading
5) Financial Strength Ratings 6) Fund Ratings
7) GVC Ratings 8) Maritime Grading 9) MFI Grading
10) Project Credit Ratings 11) Recovery Risk Ratings
ICRA Limited (formerly Investment Information and Credit Rating Agency of India
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. The international Credit Rating
Agency Moody’s Investors Service is ICRA’s largest shareholder.
No. Of Companies rated In AP is 800.
Time taken to complete the rating process is 15 days
41
No. Of Items in their checklistare 21.
No. Of people in the credit team is around 25.
Market share of ICRA is 31% approx.
Products being offered by them -:
Ratings-
1) Corporate Debt Rating 2) Financial Sector Rating 3)Issuer rating 4)Bank Loan
rating 5)Corporate Governance Rating 6)Public finance rating 7)Structured
finance rating 8)SME rating 9)Mutual Fund rating 10)Infrastructure sector
rating 11)Insurance Sector rating 12) Project finance rating
Grading–
1) IPO Grading 2)Solar Power Grading 3)Microfinance Institutions Grading
4)Construction Grading 5)Real Estate Grading 6)Maritime Grading 7)Healthcare
Grading
CARE Ratings commenced operations in April 1993 and over nearly two decades, it
has established itself as the second-largest credit rating agency in India. CARE
Ratings commenced operations in April 1993 and over nearly two decades, it has
established itself as the second-largest credit rating agency in India.
No. Of Companies rated In AP is 550.
42
Time taken to complete the rating process is 3-4 weeks.
Items in their checklist vary industry wise.
No. Of people in the credit team is around 35-40.
Market share of CARE is 22% approx.
Products being offered by them are -:
1) Corporate
a)Corporate Debt Rating b)Bank Loan Ratingsc)Issuer Rating
d)Corporate Governance Ratinge)Recovery Rating
2) Financial Sector Rating3)Structured Finance Rating
4)Public Finance Rating5)SME Rating
6) SSI/ MSE Rating7)Infrastructure Sector Rating
8) Project Finance Rating
Fitch Ratings is a leading global rating agency committed to providing the world's
credit markets.
No. Of Companies rated In AP is 200.
Time taken to complete the rating process is 4-6 weeks.
Items in their check list 25.
No. Of people in the credit team is only 4.
Market share of Fitch is 8% approx.
43
Products being rated by them -:
1) Bank Loan Rating 2) SSI/SME Rating
3) IPO Grading 4) MNRE/ Solar Grading
Comparison in a tabular form
39%
22%
31%
8%
Market shareCRISILCAREICRAFITCH
44
Parameters CRISIL CARE ICRA
CRISIL CARE ICRA FITCH0
200
400
600
800
1000
1200
No. of companies rated in A.P.
No. of com-panies rated in A.P.
CRISIL CARE ICRA FITCH0
1
2
3
4
5
6
Duration of Rating process (weeks)
Duration of Rat-ing process (weeks)
CRISIL CARE ICRA FITCH0
5
10
15
20
25
30
No.of Items in Check list
No.of Items in Check list
CRISIL CARE ICRA FITCH0
5
10
15
20
25
No. of products of-fered
No. of products offered
45
1.14 Details on CREDIT PROJECT
Apart from the Business Development Project, I am also working on a credit project
in which we have to develop the template. We are working on developing a template
for Real Estate companies.
Introduction:
Specific Credit Factors: This report addresses Fitch Ratings’ specific credit factors
used when analysing Indian real estate companies on the national scale. After
highlighting the sector risk profile, it defines and groups the ratings of companies
operating in the sector into a “natural rating territory”, based on Fitch’s view of the
inherent risk profile of the sector. The report then examines additional company-
specific traits that may influence the rating and therefore more finely categorise
companies by rating level. Finally, the report explains how a company’s financial
profile (credit metrics) influences its creditworthiness and final rating.
Sector Risk Profile:
Fragmented and dominated by regional players: The real estate sector in India is
regional, limiting their activities to certain cities and at best to cities within a region.
There are only a handful of players who have recently ventured to create a pan-India
footprint. Cities have their own set of builders ranging from Grade A premium names
to very small local players. In such a scenario, the reputation of the builder and his
project implementation track record takes primary importance in accessing the credit
worthiness of companies.
Cost structure: Volatility of the price of construction materials (steel and cement in
particular) as well as availability of labour are vital factors impacting margins of
companies. In CY2011, the industry has been plagued by rising input costs, together
with a shortage of labour (due to various rural employment schemes introduced by
the Government) and hence increase in wage cost. This adversely impacted the
margins of companies in this period, more so as it was in tandem with economic
slowdown in the country, which impacted the demand for real estate.
Cyclical Industry: The Indian real estate sector is cyclical in nature, and its fortunes
are closely contingent on the country’s economic situation. The sector can be
46
broadly divided into residential, commercial and retail. Periods of expanding
economic growth lead to demand of commercial space and through job creation,
salary increases and cheaper access to debt, foster residential demand in general.
Company-Specific Traits
Rating Categories: Fitch Ratings examines a number of sector-specific
characteristics and outlines rating categories for companies that display these under
company-specific traits. It is rare that a company will track exactly to the same rating
category for each trait or ratio. While rating committees take all factors into
consideration, they will weight some of the factors more heavily than others, such as
the cost position of operations, liquidity and financial profile.
Differentiating factors: Fitch’s approach to differentiating between companies in
this sector is both qualitative and quantitative. The qualitative factors include
promoter reputation, location advantage of the project, quantum and quality of land
bank, geographical concentration, booking levels (residential), occupancy levels
(commercial) and reputation of tenants in case of commercial. The quantitative
factors include EBITDA margin, gearing, cash cover (residential) / DSCR
(commercial) interest cover, Debt / EBITDA.
Non-financial factors
Promoter Reputation: In case of real estate companies the reputation of the
promoter is vital. Here we will look at his experience in the industry, and his track
record in completing projects as per schedule and as per committed specifications.
Projects of promoters with a market perception that rates it high on reputation would
generally command a premium and thus have higher margins vis-à-vis projects of
promoters who rank lower.
AA A BBB BB
Promoter
reputation
Reputed name
in the industry,
with a proven
track record of
successfully
Reputed
name in the
industry,
with a
proven track
Reputed
builder with
good track
record, but
lower than
Relatively new
entrant /not so
reputed
47
having
implemented
real state
projects. May
even be part of
a
conglomerate,
(Tata, Godrej),
thus imparting
promoter
strength
record pf
successfully
having
implemente
d real estate
projects.
Brand name
of builder
will garner
premium.
the A and
AA
categories in
terms of
brand
perception
Location Advantage: Projects that are located in close proximity to the main hub /
rapidly developing areas of the city command better price than those located in far
flung places. Newly developed neighbourhoods maybe as attractive as old
established ones if supported by necessary civic infrastructure. These would include
good quality roads as well as public transport providing access to major area –
especially in case of commercial hubs, connecting these to the residential areas.
Residential developments will require infrastructure like schools, hospitals, malls,
supermarkets, parks entertainment centres in close proximity.
AA A BBB BB
Location
advantage
CBD / Prime residential CBD / Prime
residential
Suburba
n /
Suburba
n resi
Periphera
l
/Peripher
al resi
Land Bank: Land is a vital resource for real estate companies. We look at land
available for development activities for the next five years. If a company hold more
than it requires for its development needs over a five year period, then it is regarded
48
as stock which cannot be readily monetised in the medium term. While acquiring
new land may be prohibitively expensive, especially within city limits, Fitch views
favourably Joint Development (JD) options which are cheaper alternatives to land
acquisition. Here, the land owner if given a pre-agreed proportion of the built-up
space (typically 30-40%), which he is free to sell / lease / rent, while the builder gets
the benefit of the land without any cash outflow, and also this works out to be
cheaper than outright purchase of the land.
AA A BBB BB
Land bank Has very low cost
land / JD opportunities
to take care of next 5
years development
needs
Has
moderately
low cost
land / JD
opportuniti
es to take
care of
next 5
years
developme
nt needs
Land
available to
cover near
term
developme
nt needs,
but not
necessarily
at an
attractive
cost
Inadequate
access to
land to
cover
medium
term
developme
nt needs
Geographical concentration: Real estate companies mainly operate in a particular
city or in a few contingent cities. We view favourably builders who have projects
across regions. Familiarity with the market in different regions will enable them to
hedge against a sluggish demand / competition in a particular region, and also take
advantage of local factors boosting the demand in a region. The table below
provides broad guidelines on the degree of geographical concentration for various
categories.
AA A BBB BB
49
Geographical
concentration in a city
(in terms of space under
construction)
<60
%
60-
75%
Moderate
75-85%
High >85% of
projects
Residential booking levels: The construction cost of residential projects is funded
by a mix of promoter equity, debt and customer advances. Banks typically would
fund up to 70% of the construction cost. The primary source of the loan repayment is
the receivables from sales. Thus, when we are accessing the credit worthiness of
real estate companies, the booking level of residential projects are of vital
importance which determines the timely debt repayment ability of the company. Low
booking level does not mean that the company can stop constructing – it may at
most slowdown. Thus low booking means that while construction cost is being
incurred funded by the loan, cash inflows are lower than that required to service
debt. Slowing construction further impacts the reputation of the builder, and may
adversely impact sales of future launches. In case of single project companies, the
problem is more acute than in case of multiple project companies. In the latter case,
unencumbered cash surplus from one project can be used to meet debt repayment
obligations of a project with weak cash flows where bookings are low. For multiple
project companies, we will look at the over all booking level for all projects as a
whole. Typically, booking levels will be lower at the start of a project, and will
increase as the project progresses, and timely completion is more certain.
AA A BBB BB
Booking levels
(residential)
70-80% 60-70% 50-60% <50%
Commercial occupancy levels: Commercial properties constructed by builders are
not sold out-right – office spaces are leased out to companies. Construction loan
50
taken for properties are repaid through lease rental discounting (LRD). Banks
discount the net lease rentals (after netting off any recurring costs) that the real
estate company receives from a property for a specified period (eg. 5 years or 7
years), and 70-75% of this is given as a loan to the company. The company uses
this to repay the original construction loan to the bank, and the cash from the rentals
are used to repay the LRD in the form of equated monthly instalments (EMI). The
interest on the LRD loan is periodically reset as mutually agreed between the
company and the bank. Hence for commercial properties the level of occupancy
becomes vital in analysing a company’s debt repayment ability. In case of new
construction, comfort is drawn in situations where spaces are leased out before
construction commences.
AA A BBB BB
Occupancy level
(commercial)
Almost all
space pre-
sold
Significant
(80%+) pre-
sold
Moderate
presales (70-
80%)
Presales
<70%
Reputation of tenants in commercial properties: Since lease rentals are the
primary repayment source for LRD loans, the reputation of tenants occupying
commercial spaces assumes importance as this will determine the degree of
unhindered rental inflow. Ideally, offices of reputed MNCs who have long term plans
of spreading their business in the country or strong Indian corporates are regarded
as ‘safe’ tenants, likely to stay till the end of the contract period, and renew contracts
periodically. Long association with the lessee, especially when the lessor occupies
substantial commercial space is likely to result discounts in rentals and encourage
the lessor to continue. Such tenants are least likely to result in vacancy. We would
view with caution small companies, especially which are either not performing well at
a company level, or are in recessionary industries – such tenants are likely to
downsize operations and vacate leased office premises.
AA A BBB BB
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Reputation of
tenants
Highly reputed
tenants (eg.
Reputed
MNCs, and
Indian
companies)
with good
business
prospects who
are highly
likely to renew
contracts in
the
foreseeable
future.
Reputed
tenants with
favourable
business
outlook in
the near
term, who
are likely to
renew
contracts
Good
profile,
maybe
reputed
medium
scale local
companies
, with
relatively
good
business
outlook,
with a
moderate
likelihood
of
renewing
contracts
Moderate
tenant
profile,
which
moderate
risk of non-
renewal of
contract
Financial factors
Strength of project cash flow: While analysing real estate companies, we do not
focus on the monthly cash flow rather than on revenues and P&L statement. This is
because the P&L revenue is accounted on a percentage completion method, and
does not give the true picture of the cash inflow from sales. Cash from sale of flats
flow in at regular intervals. Eg. 20% at the time of booking, then remaining in equal
quarterly instalments over 24 months. Apart from the construction loan drawdown
and promoter funding, this is primarily the cash that the company has repay its debt
obligation. The following table shows how we analyse the cash flows form flat sales.
We calculate debt service coverage ratio (DSCR) as defined below (both with and
without opening cash balance), as a parameter to analyse the strength of the project
cash flows.
52
The table below distinguishes between cash flow from new sales and past sales.
Cash flow from new sales is nothing but the 20% upfront payment as in the example
in the above paragraph, while cash flow form past sales is the remaining 80% that
has to be paid over a period.
We can use the cash flow table to make the following analysis:
(1) If there are no new sales, then for how many periods can past sales sustain
committed expenses including debt service?
(2) What is the minimum number of new flats that need to be sold in each period
to breakeven, i.e. arrive at a DSCR of 1?
INR mn P1 P2 P3 --- Pn
Opening cash
Cash inflow from new sales
Cash inflow from past sales
Loan inflow
Other inflow (equity, land sales etc)
A: Total cash available
Construction cost
SG&A
Taxes
B: Total cash expenses
C = A - B: Cash available for debt
service
Interest payment
Principal payment
D: Total debt service
53
E: C – D: Closing cash
C/D: DSCR with opening cash
(C less opening cash) / D: DSCR
without opening cash
Profitability: EBITDA margin: Construction costs like steel, cement as well as
labour costs impact margins of real estate companies. In a given project, if
construction costs increase after majority of apartments has been sold, the company
will not be able to pass on the increased costs to the consumers. Also, if increase in
construction costs happen at a time when demand is sluggish, then it is difficult for
the company to pass on the costs to the end consumer, as well as to boost up sales
by offering discounts. We look at the EBITDA margin to understand the profitability.
A margin compression is to be viewed with caution as ultimately it will adversely
impact the coverage and leverage of the company.
Leverage and financial flexibility: Leverage provides a measure of the company’s
ability of service its debt from its operating profits. To measure leverage, we use
Debt / EBITDA. In order to understand the company’s financial flexibility we look at
the gearing (total debt / total net worth) ratio. A low gearing means the company has
the financial flexibility to raise further debt either for new projects, debt refinancing or
for tiding over short term cash flow mismatches. A high gearing may threaten
liquidity by restricting avenues for fund raising.
1.15 ANNEXURE
Training schedule was as follows-:
54
Summer Trainee Program
Time table of training program
Program particulars
Day 1 Topic
1. Fitch Introduction
2. About Credit Ratings
3. Basel-II Norms
4. Reading the Material
Day 2 Topic
1. About the Banking
2. About RBI & SEBI
2. Types of Bank Funding
4. Reading the Material
Day 3 Topic
1. About of Balance sheet items
2. Industries in AP /Hyd.
3. Types of Companies
4. Reading the Material
Day 4 Topic
1. Bank Loan Rating Process
2. How to Plan for meetings?
3. How to interact with company
officials?
4. Reading the Material
Day 5 Topic
1. About Questionnaire
2. Points to be discussed during
55
the mtg.
3. Reading the Material
Day 6 Topic
Mock Meetings-1
Day 7 Topic
Mock Meetings-2
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1.16 REFERENCES:
http://en.wikipedia.org/wiki/Basel_I
http://www.piie.com/publications/chapters_preview/4235/03iie4235.pdf
http://www.investopedia.com/terms/b/basel_I.asp
http://www.fitchratings.com/jsp/creditdesk/AboutFitch.faces?context=1&detail=1
http://www.fitchratings.com/web_content/marcom/corporate_brochure.pdf
http://www.fitchratings.com/jsp/creditdesk/AboutFitch.faces?context=1&detail=3
http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CCRA030310_R2.pdf
http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf
http://www.signet.org.uk/public_pdf/12%20and%2013%20Return%20on%20capital
%20employed.pdf
http://www.ischool.utexas.edu/~palmquis/courses/content.html
http://chiaraogan.com/euroia_cfox08.pdf
http://www.unctad.org/en/docs/osgdp20081_en.pdf
http://www.investopedia.com/terms/e/ebitdar.asp
http://samples.breakingintowallstreet.com.s3.amazonaws.com/23-BIWS-Debt-
Primer.pdf
http://writing.colostate.edu/guides/research/content/
http://www.audiencedialogue.net/kya16a.html
http://www.bis.org/bcbs/ca/lwhit.pdf
http://www.projectsmonitor.com/MISC/swot-analysis-of-indian-infrastructure-is-
encouraging
https://www2.bc.edu/~kisgen/Kisgen-CRCS2.pdf
60
http://www.cfr.org/united-states/credit-rating-controversy/p22328
http://www.adbi.org/working-paper/
2010/01/26/3446.credit.rating.agencies.european.banking/
the.role.played.by.credit.rating.agencies.in.the.financial.crisis/
http://mostlyeconomics.wordpress.com/2009/09/03/history-of-credit-rating-agencies/
http://mgt.guc.edu.eg/wpapers/026hassan_kalhoefer2011.pdf
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=904077
http://www.isb.gov.uk/hmt.isb.application.2/BIDDERS/Definition%20of%20Capital
%20Expenditure.pdf
http://www.universalteacher4u.com/cbse/xii/acctheory/ch11/page1.htm
http://pages.stern.nyu.edu/~igiddy/articles/ebitda.pdf
http://www.marketresearchindia.in/
Real_Estate_&_Construction_Market_Research_in_India.pdf
http://www.iitk.ac.in/infocell/announce/convention/papers/Changing%20Playfield-07-
Milind%20Despande%20final.pdf
61