PACRA PRE

Presentation sectionCredit rating agenciesDefinitionIntroductionIn Pakistan (PACRA & JCR-VIS)Instruments ratingComparison b/w PACRA & JCR-VIS ratingRating scale helps investors by showing credit worthiness Conclusion

Credit rating agenciesDefinition: A credit ratings agency is

a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgage-backed securities. These institutions can be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market.

Credit rating agenciesIntroduction: A credit rating agency (CRA)

is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves.

the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e. bonds) that can be traded on a secondary market.

introductionThe Raters: There are three top agencies that deal in credit

ratings for the investment world. These are: Moody's, Standard and Poor's (S&P's) and Fitch IBCA. Each of these agencies aims to provide a rating system to help investors determine the risk associated with investing in a specific company, investing instrument or market.

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans, preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a country's investment surroundings and/or a company's ability to honor its debt responsibilities.

For exampleBond Rating

Grade RiskMoody's

Standard & Poor's

Aaa AAA Investment Lowest Risk

Aa AA Investment Low Risk

A A Investment Low Risk

Baa BBB Investment Medium Risk

Ba, B BB, B Junk High Risk

Caa/Ca/C CCC/CC/C Junk Highest Risk

C D Junk In Default

Rating Scale

Each credit rating agency uses its own criteria and methodology to evaluate creditworthiness.

Ratings are typically expressed as a grade, such as AAA, BB, or CC,

AAA: denoting the strongestBBB: good credit qualityCCC: A high default riskD: the weakest

PACRA & JCR-VISPACRA stand for Pakistan Credit Rating Agency.The primary function of PACRA is to evaluate the

capacity and willingness of a corporate entity to honor its debt obligations.

PACRA ratings reflect an independent, professional and impartial assessment of the credit risk associated with a particular debt instrument or a corporate entity.

PACRA's ratings facilitate investors in making prudent investment decisions after determining the acceptable rate of return at the given risk level.

PACRA

PACRA was established in 1994 as a joint venture among IBCA Limited (the international credit rating agency), International Finance Corporation (IFC) and the Lahore Stock Exchange.

PACRA has also successfully completed two international rating assignments in collaboration with Fitch.

JCR-VISIt also do rating similar to PACRA along it

also do currency ratings.VIS is a credit rating company which is now working with JCR and they combine doing ratings.

CR-VIS Credit Rating Co. Ltd. (JCR-VIS), approved by Securities & Exchange Commission of Pakistan and State Bank of Pakistan, is operating as a ‘Full Service’ rating agency providing independent rating services in Pakistan.

JCR-VISJCR-VIS is a joint venture between Japan Credit Rating Agency, Ltd. (JCR) - Japan's premier rating agency, Vital Information Services (Pvt.) Limited (VIS) – Pakistan’s only independent financial research organization, Karachi Stock Exchange and Islamabad Stock Exchange

Five classes of credit ratings:

(1) Financial institutions, brokers, or dealers;

(2) Insurance companies;(3) Corporate issuers; (4) Issuers of asset-backed securities;

and (5) Issuers of government securities

municipal securities, or securities issued by a foreign government.

Instrument rating Instrument rating covers all non-equity

instruments including TFCs (long and short term), Sukuks, and bonds.

A bond is considered investment grade or IG. Bonds that are not rated as investment-grade bonds are known as high yield bonds or more derisively as junk bonds.

Instrument rating The risks associated with investment-grade

bonds (or investment-grade corporate debt) are considered significantly higher than those associated with first-class government bonds.

The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market's belief in the stability of the economy.

COMPARISON B/W PACRA & JCR-VIS RATINGPACRAStandard rating scale and definition used by Pakistan rating agency (pacra)

JCR-VISStandard rating scales and definition being used by jcr_vis credit rating company

AAA – highest credit quality: ‘AAA’ ratings denote the lowest expectation of credit risk. best quality borrowers, reliable and stable without a foreseeable risk to future payments of interest and principal.AA – very high credit quality: ‘A’ ratings denote a very low expectation of credit risk. The capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A – high credit quality: ‘A’ ratings denote a low expectation of credit risk. This capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

AAA: Highest Credit quality. The risk factors are negligible being only slightly more than for risk-free Government of Pakistan debt.

AA+, AA, AA- : High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- : Good credit quality. Protection factors are adequate. Risk factors may vary with the possible changes in the economy.

BBB – good credit quality: ‘BBB’ ratings indicate that there is currently a low expectation of credit risk.

BB – ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time;

B – ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met.

BBB+, BBB, BBB- : Adequate credit quality. Protection factors are reasonable and sufficient. Risk factors are considered variable if changes occur in the economy. BB+, BB, BB- : Obligation deemed likely to be met when due. Protection factors are capable of weakening if changes occur in the economy.B+, B, B- : Obligations deemed less likely to be met when due. Protection factors are capable of fluctuating widely if changes occur in the economy.

CCC, CC, and C – high default risk: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments.

A ‘CC’ rating indicates that default of some kind appears probable.

‘C’ ratings signal imminent default.

D: Obligations which have a high risk of default or which are currently in default.

CCC: Considerable uncertainty exists towards obligations when due.

CC: A high default risk.

C: A very high default risk. D: Defaulted obligations.

Rating scale helps investors by showing credit worthiness

Help companies to attract investors.Help investors in investment decisions.

Rating= worthinessAAA: An obligor has EXTREMELY STRONG capacity

to meet its financial commitments.BBB: An obligor has ADEQUATE capacity to meet its

financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

CCC: An obligor is CURRENTLY VULNERABLE, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.

D: An obligor has failed to pay one or more of its financial obligations (rated or unrated) when it became due.

Conclusions: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 issuers on the other side, about the creditworthiness of companies or countries.

Ratings tend to be sticky, lagging markets, and overreact when they do change. 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.

ConclusionsA credit rating is a useful tool not only for the

investor, but also for the entities looking for investors. An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy.

the credit rating acts to facilitate investments, many countries and companies will strive to maintain and improve their ratings, hence ensuring a stable political environment and a more transparent capital market.