CRISIL And Its Ratings

Credit Rating and Information Services of India Ltd. (CRISIL) is India’s leading Ratings, Research, Risk and Policy Advisory Company based in Mumbai .CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed business leader in India.CRISIL’s rating experience covers more than 45000 entities, including 30,000 small and medium enterprises (SMEs).

Now if you buy bonds,NCDs etc.you have probably come across CRISIL Ratings.The table below explains them.

CRISIL AAA (Highest Safety)	Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
CRISIL AA (High Safety)	Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
CRISIL A (Adequate Safety)	Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
CRISIL BBB (Moderate Safety)	Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
CRISIL BB (Moderate Risk)	Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
CRISIL B (High Risk)	Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
CRISIL C (Very High Risk)	Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
CRISIL D Default	Instruments with this rating are in default or are expected to be in default soon.
Note:	CRISIL may apply ‘+’ (plus) or ‘-‘ (minus) signs for ratings from ‘CRISIL AA’ to ‘CRISIL C’ to reflect comparative standing within the category.

When it comes to choosing fixed income instruments like bond,ratings matter from a capital safety perspective and also from a liquidity and capital gains perspective .Here are some interesting facts from CRISIL’s Annual Default and Rating Transition Study-2011 ( CADARTS -2011):

1.)If we look at CRISIL’s average cumulative default rates for long-term ratings over one- two- three- years between 1988 and 2011 we see that not a single instrument rated CRISIL AAA has ever defaulted.

2.)For CRISIL AA rated instruments, 1.09% have defaulted over a three-year period.Between 1988 and 2011 almost 91.87% of the instruments rated in the CRISIL AA category remained in that category at the end of one year; 1.77% were upgraded to a higher rating (CRISIL AAA), and around 6.2% were downgraded to a lower rating.

3.)Default rates  go up as we come down the rating ladder. For example, 5.8%, 12.52% and 24.58% of total instruments with CRISIL BB rating have defaulted over one-, two- and three-year periods, respectively.

So statistics makes a strong case for being with AAA rated bonds, if capital safety is of utmost importance, as AAA signifies the least risk of default. But there is perhaps an exception to this rule. Public sector undertakings are highly unlikely to default on borrowings. So even an instrument with a rating one or two notchs below AAA rating makes investment sense for investors.In some such cases, investors are also compensated for that lower rating by higher returns. HUDCO tax-free bonds with AA rating are a case in point. These are the only tax-free bonds that come with AA rating, whereas others carry AAA rating.

In the listed bonds and NCD space, one comes across yields in excess of 15%.But whether one should buy them is something to be thought about seriously.For example,AA- rated NBFC bonds listed on exchanges carry not only a credit risk much higher than AAA-rated bonds but also a greater liquidity risk.As professional money managers prefer to keep the credit risk at bay and stick with AAA or equivalent instruments,it pushes up the demand for AAA bonds and creates a liquid market for them. Better liquidity facilitates fair price discovery of an instrument. So If you are buying an instrument with a view that interest rates will come down and intend to book capital gains, better be with AAA bonds.The probability that you will able to sell your AAA rated bond at fair value is more than AA rated bonds.

Ofcourse,if you are OK with taking some risks,then there is another type of game to play, especially when stock markets are flat.Find bonds with lower ratings from companies who care about their reputation and buy them.Often the company and/or the general economy will improve and you can realize come capital gains from your bonds.A case in point is 11.35% Tata Motor Finance perpetual bond issued in 2010 with a rating of A+ stable. In June 2011, the rating was upgraded to AA- stable from A+ stable. The price moved up and liquidity too improved.

BTW if you want to take a look at the CADARTS -2011 report,you can get your copy here:http://www.crisil.com/downloads/latestReports.jsp?pdfFilePath=../pdf/ratings/crisil-rating-default-study-2011.pdf&displayName=CRISIL%20Annual%20Default%20and%20Ratings%20Transition%20Study%20-%202011