Financial Flexibility: Having financial flexibility allows a company the latitude to meet its debt service obligation and manager stress without eroding credit quality. In terms of debt, the more conservatively capitalized a company, the greater its flexibility, in addition, a commitment to maintaining debt within a certain ranger allows a company to cope with the impact of unexpected events on the balance sheet.
Other factors that contribute to financial flexibility are the ability to redeploy assets and revise plans for capital spending, strong
banking relationships and equity market access.
Project Risk Evaluation: in the case of companies implementing a project of significant size, it is evaluated the risks associated with that project, and factors in these risks while arriving at the overall rating. The relative size of the project as compared with the overall operations of the rated entity would indicate the relative significance of the project risk within the overall rating opinion.
Rating Agencies in Pakistan PACRA Rating is an interactive
process relying primarily in gathering
information from the issuer and supplementing it with strategic information obtained from outside independent sources. The entire process is aimed at evaluating (a) Financial Risk and (b) Business Risk Information with regard to (a) is generally provided by the company requesting for rating and, only when necessary, such information is corroborated or complemented by information from other sources. However, comprehensive information with regard to (b) is not readily available from any identifiable source. PACRA has, therefore, proceeded to develop its own database consisting of economic data by industrial sub-sectors. Additionally, it continuously monitors macroeconomic developments and important government policy changes (like fiscal adjustments) for determining their likely impact on specific sectors and companies.
PACRA does not assign unsolicited ratings. This policy is based on our sensitivity regarding the motivation for such a practice: globally, unsolicited ratings have come under criticism as they seem to be a means of pressurizing recalcitrant entities to subject themselves to rating. Again, the value of credit rating flows from the interactive nature of the exercise. Thus, unless the rated entity has an opportunity to share the reasons for any delinquent performance in the past and its view on prospects, the rating opinion may not be reliable.
The rating process begins with a careful review of an entity's published information. From this review, analysts (normally two, the lead and support analyst, are assigned to each rating assignment) determine what additional data are needed and a detailed questionnaire is sent to the client. An initial rating assessment is made and discussed internally. A discussion agenda is then prepared for a meeting with the client company's senior management. The meeting is wide-ranging, covering the company's financial position, earning trends, operating practices, competitive standing, future prospects, the economic environment and many other issues that can have a bearing on PACRA's assessment. In order to ensure full understanding of their position, companies entrust PACRA with confidential information, which is not disclosed in rating reports but which is certainly taken into account when assigning the ratings.
In determining the initial ratings for an institution, a rating proposal is prepared based on the information gathered at the Management Meeting with the company, and is presented to the rating committee (comprising the Chairman, Managing Director, senior executives and the lead analyst). A draft rating report is then prepared and sent to the client for verification of the accuracy and confidentiality of the information in the report. Upon the client's approval, the one-page summary of the report is made public and a press release of the assigned rating is issued. The detailed rating report is sent to the client.
Rating Watch: As and when any significant changes take place, the existing rating is placed on ‘Rating Watch'. The rating is then upgraded, downgraded or maintained after assessing the impact of any such change.