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Rating Season

Bangalore Development Authority's debt is rated LAA+ by ICRA.... huh?

For the debt-innocent, it's all rather confusing. Now, debt is a simple idea, and has been around for ages--way before Western Civilisation stopped being such an oxymoron. But the alphabet soup that has begun to swamp the scenario remains an area that many fear to tread.

Fear not. Begin with ICRA--Investment information and Credit Rating Agency. Note that this is an agency, not an authority. It serves a vital purpose, nonetheless, to the Indian financial market. It examines the financial soundness of the country's many issuers of debt, and works out the respective likelihoods of the debt being repaid nice and proper, contractually. These 'ratings' are then offered by way of advice to investors in debt.

Likelihoods are classically understood as mathematical probabilities (which range from the impossibility of 0 to the theoretical certainty of 1), but since this sort of calibration could befuddle investors, or maybe even scare them off, ratings are done alphabetically rather than numerically, with plus and minus signs indicating fractional differences. LAA+, for example, is a delta difference higher than a standard LAA rating. The interesting part, though, is the differences between, say, LAAA, LAA and LA (all of which, by the way, are ratings debt issuers cherish).

Anyhow, to clear up any misperceptions, here follows the ICRA key for long-term debentures, bonds and preference shares:

LAAA: Highest safety. Indicates strong position. Risk factors are negligible. There may be circumstances adversely affecting the degree of safety but such circumstances, as may be visualised, are not likely to affect the timely payment of principal and interest as per terms.

LAA: High Safety. Risk factors are modest and may vary slightly. The protective factors are strong and the prospect of timely payment of principal and interest as per terms under adverse circumstances, as may be visualised, differs from 'LAAA' only marginally.

LA: Adequate safety. Risk factors are more variable and greater in periods of economic stress. The protective factors are average and any adverse change in circumstances, as may be visualised, may alter the strength and affect the timely payment of principal and interest as per terms.

LBBB: Moderate safety. Considerable variability in risk factors. The protective factors are below average. Adverse changes in business/economic circumstances are likely to affect the timely payment of principal and interest as per terms.

LBB: Inadequate safety. The timely payment of principal and interest are more likely to be affected by present or prospective changes in business/economic conditions. The protective factors fluctuate in case of changes in conditions.

LB: Risk prone. Risk factors indicate that obligations may not be met when due. The protective factors are narrow. Adverse changes in business/economic conditions could result in inability/unwillingness to service debts on time as per terms.

LC: Substantial risk. There are inherent elements of risk and timely servicing of debts/obligations could be possible only in case of continued existence of favourable circumstances.

LD: Default. Extremely speculative. Either already in default in payment of interest and/or principal as per terms or expected to default. Recovery is likely only on liquidation or re-organisation.

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