Understanding CRISIL’s Ratings

and Rating Scales

A CRISIL credit rating indicates CRISIL’s current opinion on the probability of
default. In other words, the credit rating indicates the probability of an investor
in rated instruments, or a lender to a rated entity, not receiving interest and
principal payments due on time and in accordance with the terms of the initial
contract. This probability is reflected in the form of an easily understandable
alphabetical scale, with ratings such as ‘AAA’, ‘AA’, ‘A’, or ‘BBB’.

A credit rating is assigned to debt alone and NOT to equity instruments.

Typically, instruments such as non-convertible debentures, partially
convertible debentures, bonds, fixed deposits, commercial paper, short-term
debt and structured debentures, are rated. Entities issuing these instruments
can also be rated on their capacity to service their debt obligations on time.

A credit rating on an instrument is NOT a recommendation by the rating

agency to invest in any particular instrument. Instead, it is one of several inputs
(such as price, coupon rate, tenor, and redemption pattern) that investors can
consider while making investment decisions. A CRISIL rating is not a
recommendation to buy, sell or hold a rated instrument; nor is it a comment on
the market price or the suitability of a rated instrument for a particular investor.
Similarly, a CRISIL rating on a company is not a recommendation to lend to that
company or to buy, sell or hold any instrument issued by the company.
CRISIL’s ratings are based on qualitative and quantitative analysis of the
information provided by issuers or rated entities, or obtained from other
sources considered reliable; they do not constitute audits of issuers or rated
entities.

Moreover, a credit rating does NOT indicate that payment of interest and
principal is completely certain. There are definitive non-zero probabilities of
default for any rating category including the highest one, ‘AAA’. For example,
if the probability of default for a rating agency’s ‘AAA’ category is 0.1 per cent
in three years, it indicates that out of 1000 ‘AAA’ ratings that the agency has
assigned, ONE could default on paying interest or principal within a period of
three years of assigning/reaffirming the rating.
CRITERIA - Rating Perspective

A credit rating indicates the issuer’s ability and willingness to pay interest and
principal on time. The rating agency assigns ratings on the basis of its analysis
of the business and financial risks associated with an issuing or borrowing
entity, and an evaluation of the entity’s management. Once a rating is assigned
and accepted, the rating agency continuously monitors the credit quality of the
rated instrument or entity, and reflects the same periodically through an
upgrade, downgrade, or reaffirmation of rating till such time the rating is
withdrawn. CRISIL’s ratings may be changed, suspended, withdrawn or
placed on rating watch based on any specific event or events. Accordingly,
CRISIL notifies investors of the same from time to time. An issuer rating may be
withdrawn at the request of the issuer; issue-specific ratings are withdrawn
only upon full redemption of the rated instrument.

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CRISIL’s rating scales
Broadly, CRISIL’s credit ratings fall under four
categories: long-term, short-term, fixed deposit,
and corporate credit ratings. The term 'long-term
instruments' includes bonds, debentures, other
securities, term loans, and other fund-based and
non-fund-based facilities with an original
maturity of more than one year. Long-term rating
categories range from ‘AAA’ to ‘D’; CRISIL may
apply ‘+’ (plus) or ‘-’ (minus) signs as suffixes to
ratings from ‘AA’ to ‘C’ to reflect the comparative
standing within the rating category.
The term 'short-term instruments' refers to
commercial paper, short-term debentures,
certificates of deposit, inter-corporate deposits,
working capital borrowings, and other fund-
based and non-fund-based facilities with an
original maturity of one year or less. Short-term
rating categories range from ‘P1’ to ‘P5’; CRISIL
may apply a ‘+’ (plus) sign for ratings from ‘P1’ to
‘P3’ to reflect a comparatively higher standing
within the category.
CRISIL assigns ratings to the fixed deposit
programmes of corporates, banks and financial
institutions with the prefix, ‘F’. Fixed deposit
rating categories range from ‘FAAA’ to ‘FD’;
CRISIL may apply ‘+’ or ‘-’ signs to ratings from
‘FAA’ to ‘FC’ to indicate the relative position
within the rating category.
CRISIL also assigns corporate credit ratings to
issuers. The corporate credit rating categories
range from ‘CCR AAA’ to ‘CCR D’ and ‘CCR SD’
(indicating selective default); CRISIL may apply
‘+’ (plus) or ‘-’ (minus) signs as suffixes to ratings
from ‘CCR AA’ to ‘CCR C’, to reflect the
comparative standing within the rating category.
For complete definitions of these rating scales, refer to
the section, ‘CRISIL Rating Symbols,’ at the end of this
booklet.
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CRISIL’s speculative grade ratings
A clear categorisation of speculative grade ratings
is necessary to enable investors to determine the
state of the issuer or obligor with reference to the
ability and willingness to meet the debt
obligations on time under a variety of
circumstances.
Instruments and issuers rated in the ‘BB’, ‘B’, ‘C’ or
‘D’ categories are regarded as having significant
speculative characteristics. Although these
obligations/issuers may feature a certain degree of
debt protection, this may be outweighed by large
uncertainties or exposure to adverse conditions.
CRISIL’s criterion for the lowest rating, ‘default’
or ‘D’, is normally event-specific: any delay in the
payment of interest/principal of the rated debt
would result in a rating revision to ‘D’. CRISIL
applies this definition strictly to all rated debt
instruments; even a day’s delay on the rated debt
would result in a downgrade to the default (‘D’)
rating. CRISIL will downgrade a corporate credit
rating to ‘CCR SD’ (selective default) if the rated
entity has selectively defaulted on a specific issue
or class of debt, but CRISIL expects that the entity
will continue to meet its obligations on other
issues or classes of debt in a timely manner. In all
other cases of generic default, the corporate credit
rating will be revised to ‘CCR D’. The criteria for
the ‘BB’, ‘B’ and ‘C’ categories are based on aspects
such as solvency and liquidity conditions, long-
term business prospects and rescheduling of debt
payments.
Ratings in the ‘C’ category indicate a highly-
strained financial position: in all likelihood,
entities that are rated ‘CCR C’ or have instruments
rated ‘C’ would be defaulting on borrowings
other than the rated borrowings. The business
outlook, even if it is positive for the long term,
may not help the company recover from its
current financial crisis unless some external
support, restructuring or reorganisation
materialises.
Ratings in the ‘B’ category indicate that the issuer’s
or entity’s financial position is strained, or that its
business prospects are weak. The issuer is
expected to reschedule forthcoming debt
repayments by extending their maturity. CRISIL
may also assign a rating in ‘B’ category if it doubts
the willingness of the management to honour the
entity’s debt obligations.
Ratings in the ‘BB’ category indicate that all
repayments of rated and unrated paper to all
investors are currently being met on time.
However, the intrinsic business/financial
position has speculative characteristics, which
may adversely affect the timely payment of
interest and principal in future.
CRISIL’s ratings in the ‘NM’ category
CRISIL assigns a ‘Not Meaningful’ (NM) rating to
outstanding ratings of companies, where the
existing rating on the instrument has been
rendered meaningless. For instance, CRISIL may
revise the outstanding rating to ‘NM’ in the case of
instruments issued by companies that have been
referred to the Board for Industrial and Financial
Reconstruction (BIFR), or have been declared sick,
or in cases where the repayment obligations are
under dispute in a court.
In the case of corporates referred to BIFR, the
outstanding ratings are rendered meaningless
because the entities cannot make payments
towards meeting debt obligations till such time as
revival packages are effected by the operating
agencies. Similarly, in cases where the
interest/principal is under dispute in a court, no
payments can be made until the court delivers a
ruling on the case.
This category is applicable to three of CRISIL’s
credit rating scales: the long-term rating scale, the
fixed deposit rating scale, and the short-term
rating scale.
CRISIL’s ratings for structured obligations
CRISIL assigns ‘structured obligation’ ratings
based on the same long-term rating scale (‘AAA’
to ‘D’) with a suffix, ‘so’, in parentheses. The
assessment for a structured obligation takes into
consideration any credit enhancement structure
or mechanism that supports the payment of
interest and principal on the instrument.
Typical structures include:
! Full guarantee by a bank, corporate, or
government
! Partial guarantee
! Asset-backed securities such as
collateralised debt obligations, auto loan
securitisations, mortgage-backed securities,
and trade receivables
! Future flow structures such as escrow of
octroi or property tax receivables or lease
receivables
Structured obligation ratings apply only to
instruments, and not to the entities issuing them.
Each debt instrument issued by a company may
carry an ‘so’ rating of its own, depending on the
structure provided for the instrument.
CRISIL’s rating for instruments carrying
non-credit risk
CRISIL’s long-term rating scale addresses credit
risk, representing the likelihood of debt servicing
obligations not being met on time. CRISIL also
rates debt instruments such as fully-convertible
debentures, which carry non-credit risks (such as
market and liquidity risks). For instance, the
returns to an investor in a fully-convertible
debenture may be based on the market price of the
stocks on the date of conversion. CRISIL does not
attempt to estimate variables such as future stock
prices, and therefore does not factor such risk into
the rating it assigns. In order to disclose the
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presence of non-credit risks to investors, CRISIL
suffixes such ratings with the symbol ‘r’. This
denotes that the rating does not address the
variability of returns which may arise on account
of non-credit risks.
CRISIL Rating Watch
CRISIL may place a rating on ‘rating watch’,
which lists positive, negative or developing
implications, if events occur that may affect the
accuracy of the rating. A rating is placed on watch
when events occur that may affect the credit
quality of the issuer/issue, the impact of which
cannot be accurately assessed at that point in time.
However, a listing under rating watch does not
imply that a rating will necessarily change. CRISIL
may also revise ratings without first placing the
ratings on watch.
CRISIL Rating Outlook
CRISIL rating outlooks (outlooks) indicate the
direction in which ratings may move over a
medium term horizon of one-to-two years. A
rating outlook may be 'positive', 'stable' or
'negative'. A positive outlook indicates that the
rating may be upgraded; a stable outlook indicates
that the rating is likely to remain unchanged,
while a negative outlook indicates that the rating
may be lowered.
Issue-specific ratings are valid for the life of the
instrument. Therefore, as forward-looking
opinions on credit quality, CRISIL's ratings
already incorporate assessment of future
circumstances. CRISIL's rating history indicates
that a majority of its ratings have remained
relatively stable; a large proportion of the
outlooks it has assigned are 'stable'. Positive or
negative outlooks are, however, assigned when
there is likelihood that circumstances could
change beyond the extent that has been factored
into the ratings.
Outlooks are assigned to ratings of long-term
instruments and fixed deposits, barring 'C' and 'D'
category ratings. Outlooks are provided
irrespective of residual maturity for the
instruments. Long-term structured instruments
exposed to the credit risks of a single entity are
also assigned outlooks. These include ratings
based on full guarantees from a single party (if the
guarantor has consented to publishing the
outlook on its outstanding ratings) and ratings
with credit enhancements featuring an escrow
structure. No other structured instruments are
assigned outlooks. Ratings on rating watch will
not carry an outlook.