Rating methodologies of a debt instrument, Financial Management

The key parameters taken into account while rating a debt instrument are as follows:

1. Industry Evaluation - This involves an evaluation of the following:

General profile of the industry, major competitors, extent of competition, growth potential and trend of both domestic and international development.

Demand and supply position of the product, existing installed and licensed capacities, and capacities in the pipeline.

Position of import and export, technological developments, price trends, availability, source, quality and prices of major inputs.

Government policies and regulations affecting the industry and other major problems and constraints.

2. Unit Evaluation - This company level evaluation involves an assessment of the following:

Position of the unit in the industry, market share, competitive edge, major strengths and weaknesses.

Product range and quality, market segmentation and seasonality of the market, marketing strategies, channels and network.

Future program, goals and targets. Product range and portfolio diversification, need, scope and prospects of diversification and expansion.

Group/associate company performances, support and synergy.

In addition to the above mentioned parameters, the rating analysis of debt instruments issued by finance companies may include the following parameters:

  1. Regulatory and Competitive Environment Analysis - Effect of changes in regulatory structure on the operations of the finance company.

  2. Fundamental Analysis - The fundamental issues that need to be evaluated are:

Assessment of the net worth and the capital adequacy of the finance company.

Details relating to the sources of finance, cost of funds, maturity of the sources, etc.

Analyzing the credit exposures of individuals/corporates, etc., and examining the quality of credit risk management.

Maturity matching process of assets and liabilities and the liquidity management techniques.

Track record of profits, spreads maintained, non-interest income, etc.

Exposure to interest rate fluctuations and hedging mechanism.

Revision of tax laws and the sensitivity of the company to such changes.

While the above credit analysis generally applies to long-term and medium-term debt paper, the criteria for short-term debt paper will be slightly different. Symbols used for rating vary from rating agency to agency.

Posted Date: 9/11/2012 1:34:57 AM | Location : United States







Related Discussions:- Rating methodologies of a debt instrument, Assignment Help, Ask Question on Rating methodologies of a debt instrument, Get Answer, Expert's Help, Rating methodologies of a debt instrument Discussions

Write discussion on Rating methodologies of a debt instrument
Your posts are moderated
Related Questions
Can a business have a positive accounting profit and a negative economic profit? Please explain.

Margin Trading: Suppose an investor wants to buy 100 Reliance Energy shares, whose market price is Rs.500. This transaction requires Rs.50,000 but the investor has only Rs.30,0

Revenues Revenues are the gross income received before any deductions for discounts, expenses, returns, and so on. It is also called sales in most organization. A much less c

Risk of cost of capital A straightforward assumption of traditional cost of capital analysis is that firm's business and financial risk are unaffected by acceptance and financ

Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its custo

What is the correlation between the efficient portfolio and the risk-free asset? Possible answers are +1, -1, 0, or cannot be calculated.

Explain Gresham’s Law. Answer:  Gresham’s law considers to the phenomenon that bad (abundant) money drives good (scarce) money out of circulation. This type of phenomenon was fre

Treasury bonds are the bonds issued with maturities greater than 10 years. However, these are commonly issued with a maturity of 30 years. Like T-notes, these bon

What is Financial Management? Anybody can describe it.

On January 1 a bond with face value of $1,000 is for sale in the market.  That bond has a coupon rate of 6%, pays interest only once a year and the end of the year, and matures at