T.Y.B.B.

I SEM -5 (16-17)

CHAPTER 1
Introduction of Credit Rating Agency
Evolution of Credit Rating Agencies

The origins of credit rating can be traced to the 1840's. Following the financial
crisis of 1837, Louis Tappan established the first mercantile credit agency in New
York in 1841. The agency rated the ability of merchants to pay their financial
obligations. Robert Dun subsequently acquired it and its first rating guide was
published in 1859. John Bradstreet set up another similar agency in 1849, which
published a rating book in 1857. These two agencies were merged together to
form Dun and Bradstreet in 1933, which became the owner of Moody's Investors
Service in 1962.
The history of Moody's itself goes back about 100 years. John Moody (1868 1958) was a self-taught reformer who had a strong entrepreneurial drive and a
firm belief about the needs of the investment community - as well as considerable
journalistic talent. Relying on his assessment of the markets needs, John Moody
and Company published Moodys Manual of Industrial and Miscellaneous
Securities in 1900, the companys founding year. The manual provided
information and statistics on stocks and bonds of financial institutions, government
agencies, manufacturing, mining, utilities, and food companies. Within two
months, the publication had sold out. By 1903, circulation had exploded, and
Moodys Manual was known from coast to coast.

When the stock market crashed in 1907, Moodys company did not have
adequate capital to survive, and he was forced to sell his manual business.
Moody returned to the financial market in 1909 with a new idea.

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Instead of simply collecting information on the property, capitalization, and

management of companies, he now offered investors an analysis of security
values. His company would publish a book that analyzed the railroads and their
outstanding securities. It offered concise conclusions about their relative
investment quality.
Moody had now entered the business of analyzing the stocks and bonds of
Americas railroads, and with this endeavor, he became the first to rate public
market securities. In 1909, Moodys Analyses of Railroad Investments described
for readers the analytic principles that Moody used to assess a railroads
operations, management, and finance. The new manual quickly found a place in
investors hands. In 1913, he expanded his base of analyzed companies,
launching his evaluation of industrial companies and utilities. By that time, the
"Moody's ratings" had become a factor in the bond market. On July 1, 1914,
Moody's Investors Service was incorporated. That same year, Moody began
expanding rating coverage to bonds issued by US cities and other municipalities.

Further expansion of the credit rating industry took place in 1916, when the Poor's
Publishing Company published its first rating followed by the Standard Statistics
Company in 1922, and Fitch Publishing Company in 1924. The Standard
Statistics Company merged in 1941 to form Standard and Poor's, which was
subsequently taken, over by McGraw Hill in 1966. For almost 50 years, since the
setting up of Fitch Publishing in 1924, there were no major new entrants in the
field of credit rating and then in the 1970s, a number of credit rating agencies
commenced operations all over the world. These included the Canadian Bond
Rating Service (1972), Thomson Bank watch (1974), Japanese Bond Rating
Institute (1975), McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps
in 1991), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff
and Phelps Credit Rating Company (1980). There are credit rating agencies in
operation in many other countries such as Malaysia, Philippines, Mexico,
Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.

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In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set
up as the first rating agency in 1987, followed by ICRA Ltd. (formerly known as
Investment Information and Credit Rating Agency of India Limited) in 1991, and
Credit Analysis and Research Ltd. (CARE) in 1994. The ownership pattern of all
the three agencies is institutional.

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CHAPTER 2
CREDIT RATINGS: MEANING AND DEFINATION
Definitions of Credit Rating:

A rating is an opinion on the future ability and legal obligation of the issuer to
make timely payments of principal and interest on a specific fixed income security.
The rating measures the probability that the issuer will default on the security over
its life, which depending on the instrument may be a matter of days to 30 years or
more. In addition, long term ratings incorporate an assessment of the expected
monetary loss should a default occur." Moodys

"Credit ratings help investors by providing an easily recognizable, simple tool that
couples a possibly unknown issuer with an informative and meaningful symbol of
credit quality." Standard and Poors

Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple

and easily understood tool enabling the investor to differentiate between debt
instruments based on their underlying credit quality. The credit rating is thus a
symbolic indicator of the current opinion of the relative capability of the issuer to
service its debt obligation in a timely fashion, with specific reference to the
instrument being rated. It is focused on communicating to the investors, the
relative ranking of the default loss probability for a given fixed income investment,
in comparison with other rated instruments.

In fact, the rating is an opinion on the future ability and legal obligation of the
issuer to make timely payments of principal and interest on a specific fixed income
security. The rating measures the probability that the issuer will default on the

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security over its life, which depending on the instrument may be a matter of days
to 30 years or more.
In addition, long-term rating incorporates an assessment of the expected
monetary loss should a default occur. Credit rating helps investors by providing an
easily recognizable, simple tool that couples a possible unknown issuer with an
informative and meaningful symbol of credit quality. Credit rating can be defined
as an expression, through use of symbols, of the opinion about credit quality of
the issuer of security/instrument.

Credit rating does not amount to any recommendation to purchase, sell or hold
that security. It is concerned with an act of assigning values by estimating worth or
reputation of solvency, and honesty to repose trust in a person's ability and
intention to repay.
The ratings assigned are generally regarded in the investment community as an
objective evaluation of the probability that a borrower will default on a given
security issue. Default occurs whenever a security issuer is late in making one or
more payments that it is legally obligated to make. In the case of a bond, when
any interest or principal payment falls due and is not made on time, the bond is
legally in default. While many defaulted bonds ultimately resume the payment of
principal and interest, others never do, and the issuing company winds up in
bankruptcy proceedings. In most instances, holders of bonds issued by a
bankrupt company receive only a part amount on his investments, invested, once
the company's assets are sold at auction. Thus, the investor who holds title to
bankrupt bonds typically loses both principal and interest. It is no wonder, then,
that security ratings are so closely followed by investors. In fact, many investors
accept the ratings assigned by credit agencies as a substitute for their own
investigation of a security's investment quality.