Learning Curve

Rating Profile

In the monthly Factsheet, we provide the Rating Profile of debt portfolio of various funds. Let us understand what it actually signifies.

The rating profile highlights the underlying credit quality of the debt portfolio of a fund and is important as it reflects the credit risks the fund manager is taking. It is important for policyholders, to know the credit quality of their investments to determine the safety of their investment. The larger the percentage of holding is in higher rated papers, the lower is the credit risk.

Each debt security is assigned a credit rating by Credit Rating Agencies like CRISIL, CARE, ICRA, Fitch etc. A credit rating of a particular debt security defines the fundamental credit profile of that company, which helps the fund management team determine the likelihood that the issuer of the security will pay coupon payments in a timely fashion and more importantly the initial investment at maturity.

The Credit rating agency gives a forward-looking opinion about the creditworthiness of the issuer of the security by conducting extensive research before assigning a credit rating to them. This includes analysis and projecting the company's business risk, financial risk and management risk. The credit rating of the debt security affects the interest rate that the issuer will need to pay investors. Hence, stronger the credit rating the lower the interest expense for the issuer.

The securities issued by the government are assigned Sovereign rating and carry the highest level of safety. Thus government securities carry almost zero risk of default.

Corporate debt securities are assigned following credit ratings for medium to long term debt instruments:

Rating	Meaning	Description
AAA	Highest Safety	Highest degree of safety with regard to timely payment of financial obligations.
AA	High Safety	High degree of safety with regard to timely payment of financial obligations.
BBB	Moderate Safety	Changing circumstances are more likely to lead to a weakened capacity to make payments
BB	Inadequate Safety	Adverse change in circumstances could lead to inadequate capacity to make payments
B	High Risk	Adverse business or economic conditions may lead to lack of ability or willingness to make payments
C	Substantial Risk	Timely payment of financial obligations is possible only if favourable circumstances continue.
D	Default	Are expected to default on scheduled payment dates.

(Note: Ratings from 'AA' to 'C' are often modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.)

Corporate debt instruments rated below BBB- (i.e. BB+ & BELOW) are considered non- investment grade and are termed as "junk bonds" in the market.

The scale for short-term rating differs from long-term scale – where A1+ is the highest credit rating for short term debt (Money Market Instruments).

Rating profile of BSLI debt portfolio as on 31st December 2011:

It can be observed from the above graph that we maintain a high portfolio quality. We predominantly invest in highest rated instruments i.e. Sovereign, AAA and P1+/A1+ indicating that the fund is taking the least credit risk.

Arpita Nanoti
Head – Investment Communication & Advisory