How Corp Bonds Are Rated by CRISIL, ICRA and CARE

Before I lend money to a company, I want to know how it plans to pay me back. That is the question I would start with when looking at corp bonds. The interest rate matters, but so does the company’s ability to make every payment on time.

Credit ratings help me understand that ability. Agencies such as CRISIL, ICRA and CARE study a company’s business and finances, then give an opinion on its repayment risk. The rating offers a starting point for understanding the investment.

What Does a Credit Rating Mean?

Buying a corporate bond means lending money to the company that issues it. The company agrees to pay interest and return the borrowed amount according to the bond’s terms.

A rating tells me how a rating agency views the risk of those payments being missed or delayed. It does not guarantee repayment. It also does not tell me whether the bond is the right investment for my needs.

What Do the Agencies Look At?

I find the process easier to understand when I think about the questions behind the rating.

Does the company have a strong business? How much does it owe? Will it have enough money when payments are due? How carefully does its management handle borrowing and business decisions?

CRISIL examines business strength, financial health and management. It considers factors such as competition, operating efficiency and the risks the company takes. Support from a parent company can also affect the assessment.

ICRA looks closely at the company’s ability to generate cash for debt payments. This is important because earning a profit does not always mean having money available in the bank.

For example, a company might sell goods in April but receive payment in July. If interest is due in May, it still needs money to pay it. I find this a useful way to understand why agencies examine when cash comes in, rather than looking at sales alone.

CARE collects financial statements, business plans and other information. Its analysts assess the company and present their findings to a rating committee, which decides the rating.

What Do the Letters Tell Me?

On the long term scales used by CRISIL and ICRA, AAA indicates the lowest credit risk. AA indicates very low risk, A indicates low risk, and BBB indicates moderate risk.

BB, B and C indicate increasing levels of default risk. Default means failing to meet a payment obligation. D indicates default or an expectation of default soon.

A plus or minus sign shows a difference within certain categories. AA+, for instance, ranks above AA, while AA− ranks below it.

How Would I Use This Information?

When learning how to buy corporate bonds in india, I would read the latest explanation published with the rating. It helps me understand the company’s strengths and the concerns behind the assessment.

I would check for updates too. Ratings can change as a company’s circumstances change.

Before choosing corp bonds, I would also consider when I need my money back. Ratings do not cover every risk, including difficulty selling a bond or changes in its market price.

For me, the letters are only the beginning. Understanding why a bond received its rating is what makes the information useful.