CHAPTER 6 PRINCIPLES OF CREDIT ANALYSIS

CHAPTER 6 PRINCIPLES OF CREDIT ANALYSIS

1. 6.1 CREDIT RATINGS

   • A mechanism whereby an independent third party makes an assessment, based on different sources of information on the likelihood of a default in the debt payment of a corporate issuer.
   • Focuses on the specific debt instrument and not on the overall credit worthiness or financial standing of the corporate issuer.
   • Used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.
   • Once a rating is assigned, the rating agency is obliged to monitor the rating throughout the life of the rated instrument.

2. 6.2 RATINGS WATCHES

   • Focuses on identifiable events and short-term trends (e.g. mergers, acquisitions, regulatory changes, operational developments) that could alter the fundamental credit quality of a rated entity or issue.
   • Rating Watch encompasses a shorter time frame than a rating outlook. The rating is under special evaluation by RAM Ratings.

3. 6.3 RATINGS OUTLOOKS

   • A rating outlook is affixed to long-term ratings assigned by ratings agency.
   • A “positive” rating outlook means that a rating may be raised while a “negative” outlook reflects the possibility of the rating being lowered. Meanwhile, a “stable”outlook is used in situations where the rating is expected to remain unchanged over the intermediate term.
   • A rating outlook covers a 6- to 24- month time horizon.

4. 6.4 OBJECTIVES OF BOND RATINGS

   • It provides a complete, accurate and reliable information of the issuer of the bond.
   • It creates awareness on the creditworthiness among the bond investors.
   • It is a cost effective marketing tool and an effective movement of surplus fund in a financial system.
   • It provides an easily understood scale for the investors to assess a bond issue.

5. 6.5 ROLES OF RATINGS AGENCIES

   • Grade the bonds on its ability to pay interest and principal on a timely basis.
   • To reduce credit risk.
   • Help investors to know credibility of issues of bonds.
   • As marketing tool to market new bond issue.
   • Give opinion to third party on creditworthiness of bond issue.

6. 6.6 FUNCTIONS OF RATINGS AGENCIES

   • 1) Investor Protection - objective analysis of the credit quality of debt instruments aids the investor in making informed choices to determine the level of risk and associated returns they are willing to undertake for their investment.
   • 2) Enlarged Investor Pool - The alpa-numerical symbol used to indicated the relative riskiness of a variety of debt instruments are analytical skills or access to essential corporate information which is necessary to an informed investment decision.
   • 3) Information Disclosure - it has access to public as well as private, even confidential, information pertinent to the assessment of credit risk.
   • 4) Lower cost of Borrowing - A high rating assigned to a corporate borrower translates into a lower cost of borrowing for the issuer as the credit risk premium demanded investors is lower.
   • 5) Aids Issuer in Pricing Decision - a credible and objective rating is an invaluable aid to investment bankers, underwriters and brokers to determine the price of the debt.
   • Limitation of Credit Ratings
     • 1) Independent opinion only 2) No guarantee for soundness of company 3) Focus on Investment risk only 4) It just as an analytical input / info

7. 6.7 RATINGS METHODOLOGIES

   • 1) industry analysis 2) financial analysis 3) business investment 4) management evaluation 5) other areas or factors

8. 6.8 FACTORS AFFECTING THE CREDIT RATINGS

   • 1) The entity's past history of borrowing and paying off debts.
     • Any missed payments or defaults on loans negatively impact the rating.
   • 2) The entity's future economic potential.
     • If the economic future looks bright, the credit rating tends to be higher; if the borrower does not have a positive economic outlook, the credit rating will fall.
   • 3) Individual numerical credit score.
     • A high credit score indicates a stronger credit profile and will generally result in lower interest rates charged by lenders.

9. 6.9 CLASSIFICATION OF KEY RATIOS

10. 6.10 CORPORATE GOVERNANCE RATINGS

    • 1) Rating Agency Malaysia (RAM)
      • i. Corporate Credit Ratings ii. Financial Institution Rating iii. A Claims-Paying Ability Rating iv. Financial Enhancement Rating v. Sovereign Credit Rating vi. Issue Ratings vii. Debt Based Sukuk viii. Partnership-Based Sukuk ix. Project Finance Ratings x. Structured Finance Ratings xi. Sukuk Ratings xii. Financial Institution and Insurer Ratings
    • 2) Malaysia Rating Corporation Berhad (MARC)
      • 1. Corporate Debt Ratings 2. Issuer Ratings 3. Structured Finance Ratings 4. Islamic Capital Market Instrument Ratings 5. Financial Institutions Ratings 6. Corporate Credit Ratings 7. Insurer Financial Strength Ratings 8. Islamic Financial Institution Governance Ratings 9. Sovereign Issuer Credit Ratings
    • Global Rating Agencies
      • 1) Nationally Recognized Statistical Rating Organization (NRSRO)
      • 2) Standard & Poor's (S&P)
      • 3) Moody's Investors Service (Moody’s)
      • 4) Fitch Ratings

11. SYARINA NABILA BINTI MOHD SALLEH (2020976761) (JBC251/5G)

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