ZENOMIC provides rating advisory services for corporates that are seeking credit rating for their loans and bonds for the first time, by providing insights into the rating process, criteria, information requirements, etc. Broadly our offerings encompass the following:
Basel II Framework
The Reserve Bank of India (RBI) has released the final guidelines for implementation of the New Capital Adequacy Framework under the Basel II accord. RBI has aligned the risk weights of the banks’ advances portfolio to the credit quality of the respective assets. The risk weights vary from 20% for a AAA-rated credit to 150% for credits rated BB or below. For unrated credit exposures under Rs. 500 million, banks will have to provide a risk weight of 100%.
The implementation of Basel II guidelines by banks will result in banks allocating more capital for lower rated credits and unrated credits compared to higher rated credits. This would result in an opportunity loss of deploying capital in new advances and shoring up their profitability. To compensate for this opportunity loss, banks will move to risk based pricing for their advances. For the borrowers, the impact of a lower credit rating would mean higher borrowing cost while a higher credit rating would lower its borrowing cost.
What Do We Advise On?
A large number of corporates who are and who will be evaluated by external credit rating agencies are not “Rating Ready”.
In order to be rating ready, corporates need to:
- Do a self introspection on their Strengths and Weaknesses and have concrete action plans to address areas of weakness. Areas that may need to be addressed could either be on the business, financial position of the company or the management.
- Streamline Systems and processes
- Provide information in an easy to understand format. The information provided under various heads should exhibit an overall level of consistency as rating agencies undertake their own consistency checks on information provided to them.
- Articulate the future goals and plans of the company
- Brief the key personnel including the Board of Directors and key personnel of the company on the importance of the credit rating. They also have to be equipped with all the information to facilitate a meaningful dialogue with the rating agency.
The role of the consultants will be to:
- Provide a detailed understanding of the framework adopted by credit rating agencies in the country. This will prepare the ground for the subsequent steps in the road map to becoming “Rating Ready”.
- Undertake a diagnostic study of the company and a first cut evaluation of the credit quality of the company based on
- Published financial benchmarks of rating agencies
- Latest industry views published periodically by research organisations
- Peer group comparison
- Analysis of business risk, financial risk and management risk of the company
- Increasingly rating agencies also focus on corporate governance practices of the company and the consultants will also ascertain governance practices of the company and benchmark them against the best practices
- Suggest measures to improve the credit quality such as optimum capital structure, ideal liquidity measures, risk management and mitigation measures, etc. It will be entirely the management’s prerogative to implement or not implement these recommendations as some of the measures may not be under their control.
- Assist the company in preparing for the credit rating exercise including information requirements, financial forecasting, cash flow analysis, sensitivity analysis, key ratios to focus, etc. The consultants will also interact with the company officials to ascertain their level of preparation for the rating exercise and ensure that they are fully equipped to handle all queries during the rating process.
- Impart knowledge on other advanced nuances in credit rating such as issue vs. issuer ratings, liquidity back-up for short term ratings, credit enhancement mechanisms wherever feasible, etc.
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