Securities and Exchange Board of India registered credit rating agency

Rating Services

Ratings Policy

Ratings Process

Ratings Criteria

	Large Corporate
	Finance Sector
	Infrastructure Sector
	Commercial Paper
	SME
	State Governments
	Corporate Governance
	Pooled Funds
	Insurance Criteria

	April to September 2010
	October 2010 to March 2011
	April 2010 to March 2011
	April 2011 to September 2011
	Ratings Review

Commercial Paper & Short Term Debt
Rating of Commercial paper or Short term debt relates to instruments of having maturity up to one year. It may be noted that commercial paper borrowings is a popular mechanism of Indian corporate and it is seen as an alternate source for bank borrowings. The commercial paper issues are governed by RBI regulations. These corporate borrowings may be outside the limit of working capital and hence such commercial papers are treated like any other short term debt and rated similar to any other short term borrowings.

Brickwork also assigns rating for the short term debt as well as commercial paper. The methodology for both of them is a bit more complex than that of long term ratings. Before issuing any short term rating, Brickwork assigns a long term rating for the underlying credit quality of the issuer. The short term rating is then arrived based on an analysis of the liquidity risk the company faces. The liquidity risk is analyzed in detail with reference to the cash inflows as well as cash outflows, the seasonality, the backup facilities from the banks as well as support from the parent.

The following chart capture the approach & methodology used for short term rating.

Approach & Methodology
1.	Issuer Quality Assessment The assessment approach for rating short term debt is similar to that of long term rating. Assessment of long term rating follows the Brickwork’s standard process. This process typically follows assessing the industry risk, business risk, management risk, financial risk as well as technology risk and people risk. (Please refer our document Brickwork Rating process General description document along with Brickwork Rating General criteria document).
2.	Assessment of Liquidity Risk The overall liquidity risk of the organization is examined in detail. We seek details of business plan, cash flow statements, historical & financial projections, etc… from the issuer. Based on the details provided, the Brickwork team will ascertain: the cash inflows and outflows for the next one year analyse the historical behaviour to understand any seasonality, the inventory turnover as well as the receivables turn over ratios, the fund based and non fund based limits from the banks as well as other liquidity back up facilities and examine the comfort factors like support from the parent. analyse the maturity profile of the issuers’ assets & liabilities consider the overall liquidity position of the issuer including refinancing ability and other options Brickwork will put a threshold limits on the short term debt and conduct a scenario analysis
3.	Assessment of Liquidity back-up mechanism Brickwork will examine issuers’ liquidity back-up mechanism, such as bank lines for working capital, revolving credit facilities, etc…. In order to obtain Brickwork Ratings, the issuer will have to demonstrate the liquidity back-up mechanism as Brickwork considers this requirement as critical. It may be possible that even when the issuer may have high creditworthiness and in the absence of liquidity back-up mechanism, the issuer may not get a good rating for short-term debt.
4.	Mapping Long-term ratings with short-term scales The short term ratings are also linked to the long term ratings and a typical link between short term and long term rating as applicable for manufacturing companies has been shown below. As can be seen from the graph below from AAA to A+ the short term rating is mapped to P1+. Brickwork uses modifier ‘+’ from P1 to P3 only.
5.	Determining the quantum of short term debt While assessing the short term ratings Brickwork considers the quantum of short term debt as in the projections by the company as well as information on liquidity backup for the commercial paper and the short term debt. In respect of projects, Brickwork examines whether the requirement of the working capital has been adequately covered in the long term loan sanctioned for the project. Such requirement of the working capital for the period of the project construction has to be factored into the long term debt. The company should also keep at least 25% margin of the incremental networking capital during project implementation phase as part of its long term funding plan.
6.	Consider credit enhancement mechanism Finally, Brickwork examines any credit enhancement possibilities where either a parent or a multinational corporation or a bank provides a guarantee for the commercial paper of the corporation. These credit enhancements are subject to contract conditions, would enhance the short term rating for the entity.

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