What is Credit Rating Advisory and Why Do Companies Need It?

 Credit Rating Advisory: 

whether it is a bank lending money to an NBFC, an individual buying a corporate bond or a vendor giving credit to an SME, in effect all parties are placing a stake in the fact that the party receiving the loan would repay its debts. But since no one can know the thoughts of another business entity, there must be an objective measure for determining the score of a business organization - the credit rating. Because not all companies have people dedicated to understanding the rating process, many more of them seek out credit rating advisory services.

In this blog we shall see how credit rating advisory works, how the credit rating agencies operate internally and why so many NBFCs, corporates and SMEs in India are seeking credit rating advisory company as part of their financial plans.

What is Credit Rating Advisory?

Credit rating advisory services consist of professional help provided by the business entity while approaching the credit rating agency for an evaluation of its creditworthiness. Rating advisor knows everything about the working of the business entity on one hand and the analysis procedure followed by the credit rating company or agency on the other hand.

Rating advisory services involve the organization of the financial statements and management information system data in accordance to the format of agencies, the identification of any weakness prior to the discovery by an analyst, writing up the business and industrial sector description that would go into the rating note, and coordination of all the queries exchange during the review process.

None of the above-mentioned tasks alters the financial condition of the firm. No rating can be conjured up or manufactured by a rating advisor. A rating advisor needs to ensure that no holes are left in the submission that can later be filled in with unfavourable assumptions.

This advice is very helpful when the business firm is raising funds for the first time or after several years of rating.

How the Credit Rating Advisory Process Works

Understanding the process of credit rating agencies is useful when considering advisory services for your business. In India, there are several agencies such as CRISIL, ICRA, CARE and India Ratings, which have almost the same process determined by SEBI regulations for rating agencies.

1. Mandate and information exchange: The company commissions the agency and gives audited financial statements, business plans, management details, and industry data.
2. Management interview: The analysts interview management about their strategy, risk management practices, and future plans. It is at this stage that lack of clarity of answer or incomplete answer results in the highest penalty.
3. Analysis: The agency analyses business risk, financial risk, and management risk.
4. Rating committee: A panel, independent from analysts who analyse the business, determines the rating of the company.
5. Communication and acceptance: The rating is communicated to the company prior to the release of the report. The company may accept the rating, or in some cases, they may request re-rating with additional information.
6. Surveillance: There are periodic and trigger-based surveillances until the rated instrument matures, which means that the ratings of the company can change over its life cycle.

A credit rating advisory firm typically supports a business through every one of these stages, especially the information exchange and management interaction stages, where most avoidable rating pressure originates.

Credit Rating for NBFCs: Why It Carries Extra Weight

Non-Banking Financial Companies operate in a business built almost entirely on borrowed money and public confidence, which makes credit rating for NBFCs more consequential than for most other sectors.

Rating of an NBFC influences the following aspects significantly:

1. Cost of borrowing: Good rating results in cheaper bank borrowings, NCDs, and commercial paper, which directly improves margins.
2. Access to lending institutions: Many banks and mutual funds have an internal minimum rating requirement; no lending/investment is possible below that limit.
3. Regulator’s perspective: RBI has recently increased the degree of scale-based regulation of NBFCs, and the trend of rating is considered in the context of an NBFC’s regulatory layer.
4. Public confidence: In particular, among deposit taking NBFCs the rating is one of the very few independent factors that influence the public.

Due to the nature of NBFC’s balance sheet being asset oriented and having risk elements such as asset-liability mismatch and investment concentration, the rating agencies pay close attention to their analysis. A rating advisory project concerning an NBFC will include a comprehensive assessment of the asset quality classification, provisions policy, co-lending or securitization structures, and liquidity coverage, all areas vulnerable to any documentation shortcomings.

Credit Rating of Corporate Bonds and the Need for Ratings for Corporates

In order to raise money through issuance of debentures/bonds, credit ratings of corporate bonds cannot be ignored since SEBI stipulates the rating requirement for any public or private placement of debt instruments. However, the impact of the ratings goes beyond being just a regulatory formality and plays an important role in determining the business outcome of the exercise.

Some reasons corporates need to pay attention to this process:

1. Pricing advantage: Bond investors directly price the risk into the interest rate and even a notch of difference in the ratings results in a meaningful difference in the cost of borrowing.
2. Investor requirements: Some institutional investors, like insurance companies and provident funds, have mandate only for investment in bonds which are rated investment grade or above.
3. Refinancing options: Stable or improving rating trajectory allows refinancing/rollover of existing debt at maturity.
4. Future issuance track record: For corporates who intend to go on to future bond issuance plans, building up ratings track record helps in future issuance of bonds.

Corporates that engage a credit rating advisory services provider ahead of a bond issue typically get a clearer read on where their current financials stand relative to a target rating band, and time enough to address any correctable weaknesses inventory build-up, working capital stress, related-party exposures before the formal process begins.

Why SMEs Are Focused on Credit Rating Advisory

Ratings were once seen as something only large corporates or NBFCs needed. This has changed. Specialised rating scales developed by rating agencies such as CRISIL and India Ratings, as well as rating fee subsidy schemes applicable to small businesses, have increased the ease of availing credit ratings.

For SMEs, obtaining credit ratings may:

1. Get better terms on working capital facility/term loan from banks
2. Participate in large tenders, where a credit rating becomes a requirement
3. Establish credibility with new suppliers, distributors, and institutional buyers
4. Enhance reputation before undertaking any equity fundraising or public issue in the future

Since there is no dedicated finance/investor relations team in most SMEs, rating advisory services hold maximum relevance in this category. A consultant can organise financial records that may be spread across informal systems, explain the process in plain terms to promoters unfamiliar with it, and manage the entire coordination with the agency so the business owner isn't pulled away from running daily operations.

Benefits of Credit Rating to Business Organizations

For all NBFCs, corporations, and SMEs, it seems like the benefits of credit rating are quite similar:

1. Reduced cost of capital due to better negotiation of interest rates and lesser need for collateral.
2. Faster access to capital since lenders spends less time on independent due diligence when a credible external rating already exists.
3. Wider funding options including access to the bond market and to institutional lenders that have minimum rating criteria.
4. Improved market reputation with customers, vendors, and partners who see the rating as third-party validation.
5. Better internal financial discipline since the rating process itself often surfaces gaps in reporting, governance, or risk management that a business can then fix.
6. Superior bargaining power where companies are being merged/acquired or seeking private equity financing, the financial standing of the rated firm becomes more credible.

Steps Involved in Getting a Credit Rating in India: A Real Guide

1. Firstly, select a registered credit rating agency, which has been registered with SEBI and also accredited with RBI in case of bank facility ratings.
2. Prepare audited financials for the last three to five years, projected financials, details of banking arrangements, shareholding pattern, and management profiles.
3. Engage a credit rating advisor particularly if this is the company's first rating exercise or if the last rating review didn't go as expected.
4. Forward the mandate letter with the relevant fee which varies depending on the agency, instrument size, and rating category.
5. Attend the management meeting armed with consistent responses; here lies the importance of advisory preparation.
6. Examine the rating rationale draft and make clarifications prior to the actual finalisation and publication of the rating.
7. Compliance thereafter because surveillance will go on as long as the rated facility/instrument operates.

Selection of Credit Rating Consultants in India

1. Experience in the respective industry sector.
2. Requirements for NBFC advisory will differ from those of manufacturing or trading enterprises.
3. Knowledge of SEBI and RBI regulations concerning the particular rated instrument.
4. Experience in conducting the entire process, not merely its initial stages.
5. Honest fee structures, without fees contingent on the rating result (no advisor should ever guarantee a rating result).

How CorpZo Helps Businesses with Their Rating Process

In CorpZo, we help NBFCs, corporates, and SMEs who would like to visit a credit rating agency prepared, rather than react to the need in an unprepared way. We offer advisory services for credit ratings including documentation analysis, input to financial structure, interaction with the selected rating agency, and assistance with management interactions and surveillance rounds. Whether it’s a business looking for the right company credit rating choices based on their size and industry, or making a bond issuance for the first time, we are here to guide them through the process.

Conclusion

A credit rating is, at its core, a trust signal and in a lending and investment environment where trust is scarce and closely scrutinised, that signal matters more each year. Be it an (Credit Rating) for NBFCs looking at the cost of funds, a company thinking of issuing bonds or an SME hoping for improved working capital conditions, proper rating is bound to save money and time.