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
What is Capital Asset Pricing Model? Please provide me report on Capital Asset Pricing Model. It is about 2000 words count report on topic Capital Asset Pricing Model.

Dual Aspect Concept - Accounting Principle This is, no doubt, the basic concept in accounting.  Under this concept, each transaction has got a two-fold aspect: (i) yielding

Q. Illustrate Miller-Orr model recognises? The Miller-Orr model recognises which cash balance requirements are likely to fluctuate and that active management is required in r

Q. Explain career counselling process? The career counselling process should contain the following elements: a. The employee's should goals, aspirations and expectations wit

Have the large bank holding companies increased their market share at the expense of smaller institutions? A: No. A study conducted by the Federal Reserve Bank of New York reve

What is the maximum price that you would be willing to pay for a constant growth stock that has the following characteristics: (a) Dividend (Has Paid): $3.25, (b) Growth: 7%, and (

Explain and critically evaluate : a)  The relevance of committed fixed costs in deciding the optimal mix of products to maximum a company's profit and the importance of relevant

Question : (a) A project must have a useful purpose. Therefore, as a project is evaluated, the team should determine the requirements of the local community and industry. These

ESTIMATING WORKING CAPITAL REQUIREMENTS To facilitate, estimate the extent of working capital requirement of a firm, various factors are to be considered. There are various me

Post-acquisition Effect on EPS If the consideration is completely in shares, one of the effects would be a dilution in EPS suffered by Predator Company. The effect of dilution