PACRA Regulatory Framework AR
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PACRA is Pakistan's first credit rating agency, established in 1994 as a joint venture between IBCA Limited, IFC, and Lahore Stock Exchange. It evaluates companies' willingness and ability to repay debt obligations by assigning credit ratings. PACRA's regulatory framework requires companies seeking public financing or stock exchange listing to obtain credit ratings. It provides various rating products including instrument ratings, entity ratings, and fund stability ratings to evaluate risk.
PACRA Regulatory Framework AR
- 1. PACRA Pakistan Credit Rating Agency Limited Security Analysis & Portfolio Management 6/21/2014 Submitted to Mr. Hafiz M. Waqar Submitted By Arooj Rehmat Assignment
- 2. Page | 1 PACRA REGULATORY FRAME WORK The Pakistan Credit Rating Agency Limited History: The trend of establishing local rating agencies started only in the 1970s. Prior to this, the two international rating agencies, namely Standard and Poor’s, and Moody’s investor service, dominated the rating world. However, since the establishment of first known local rating agency, the Canadian Bond Rating Services in 1972, local rating agencies have proliferated across the globe, both in the developed markets (Australia, France and Japan) , and also in a large number of emerging markets. Currently, there are 17 emerging markets (Argentina, Brazil, Chile, Columbia, India, Israel, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Portugal , South Africa , Thailand , Tunisia, Venezuela) were duly recognized local rating agencies are in operation. Of these countries Pakistan joined the club in 1994, with the establishment of PACRA. It is interesting to note that in several other important emerging markets including Turkey, East European countries and republics of the former Soviet Union, rating agencies still have to be established or are in the process of being established. The main motivation for the establishment of local rating agencies is the recognition of their critical role in promoting or other fixed income securities markets. At the same time there is increasing realization that rating agencies are likely to impart efficiency to the financial and capital markets. ACRA stands for Pakistan Credit Rating Agency. It was first credit rating Company established in Pakistan. It was established in 1994 between the joint venture of IBCA Limited (the international credit rating agency), International Finance Corporation (IFC) and the Lahore Stock Exchange. The primary function of PACRA is to evaluate companies’ willingness to fulfill its debt obligations. PACRA is geared to provide a full range of credit rating services. This includes the rating of corporate entities and fixed income instruments. The ownership and management structure of PACRA ensures complete independence from any direct or indirect control of the Government, any private sector business group or financial institution. A rating assigned by the rating committee, which includes senior management of PACRA, reflects PACRA's objectively formed opinion of credit risk. Other rating reviews carried out by PACRA include Financial Strength ratings of modarabas, Mutual Fund ratings and Insurer Financial Strength (IFS) ratings for insurance companies. Regulatory Framework for Credit Rating in Pakistan: Establishment of PACRA in 1994 represents an important milestone in the development of financial infrastructure in Pakistan. More significantly, this signifies the fulfillment of all the ingredients considered necessary for the establishment of local P
- 3. Page | 2 bond (TFC) market in the country. In order to establish the sanctity and credibility of credit ratings in the country, the regulators moved quickly for prescribing the eligibility criteria for the establishment of credit rating companies and also assumed the legal authority of monitoring the functioning of such companies on a regular basis. This dual purpose which was achieved by the Corporate Law Authority through an amendment in the Security and Exchange ordinance 1969, and notification of “Credit Rating Companies Rules 1995”. The most significant eligibility condition for registration of a credit rating company is a joint venture arrangement or technical collaboration with an internationally recognized credit rating institution. PACRA having satisfied all the requirements under the rules stands duly registered with the CLA. In order to provide to investors in fixed income securities (including TFC’s), the CLA has made it mandatory for all such securities to be rated if the instrument is to be offered to the general public and listed on the stock exchange. Meanwhile, the SBP also recognized the potential benefit of credit rating in terms of augmenting the supervisory role of SBP for monitoring the performance of the financial sector. It was therefore, made mandatory for all Modarbas (an Islamic financial institution) , leasing companies , as well as investment bank to obtain credit rating . Under current regulations prescribed by the CLA – all Modarbas issuing COMs , (CERTIFICATE OF MUSHARIKA) and all the leasing companies issuing COIs (CERTIFICATE OF INVESTMENT)require to be rated on a continuing basis. Mission Statement To be accepted as the leading credit rating agency in the country through highest standards of professionalism and ethics. Evaluating Risk: PACRA ratings reflect an independent, professional opinion of the credit quality denoting the credit risk associated with a particular debt instrument or a corporate entity. By providing a measurement of risk, PACRA’s ratings facilitate investment decisions. However, PACRA’s rating is not the recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.
- 4. Page | 3 Some Important Dates and Information about the Company: Shareholding FITCH IBCA 44.45% LAHORE STOCK EXCHANGE 33.33% INTERNATIONAL FINANCE CORPORATION (IFC) 22.22% Accounting year 30th June Auditors A.F.Ferguson & Co. Charted Accountants Date of Incorporation August 18, 1994 Signing of IFC/IBCA/ LSE joint venture agree June, 15 1994 ment Establishment of camp office Nov 08, 1994 Notification of first rating Nov 08, 1994 First board meeting Nov 20, 1994 IBCA/PACRA technical service agreement Jan 15, 1995 Inauguration of PACRA office Feb 04,1995 First training workshop May 28-31, 1995 PACRA’s recognition by financi- al times, London, as a local agency Oct ,1995 Second training workshop Nov 19-29, 1995
- 5. Page | 4 Notification of 10th rating Dec 26, 1995 Registration of PACRA with CLA Feb 14, 1996 PACRA’s first international consul- tancy MAR 14 , 1996 Notification of 50th rating APR 10 , 1997 Merger of IBCA with FITCH inves- tors service , New York Dec 03 , 1997 Notification of 100th rating Sep 25, 1998 PACRA’s Rating Products: PACRA’s spectrum of rating covers: Instrument Rating Structured Finance Rating Entity Rating Insurer Financial Strength Rating Project Grading Fund Stability Rating Star Ranking /Fund Performance Ranking Capital Protection Rating Asset Manager Rating Instrument Rating: Instrument rating covers all non-equity instruments including TFC’s (long and short term), convertibles, debentures and redeemable certificates. PACRA’s rating process assumes that the return offered on such instruments (expected profit, makeup etc) is in the nature of a fixed obligation. Thus, in the case of TFC’s even though the issuing document refers to the return as ‘expected profit’, PACRA, in consonance with the shared perception of the issuer and the investor, deems this to be a contractual obligation for purpose of credit rating. Structured Finance Rating: PACRA has also developed the expertise of rating securities or structured finance debt instruments. Such instruments could have varying credit enhancement characteristics for reducing the default risk, the investment risk, or both. Structured Finance ratings focus mainly on evaluating the specific cash flows identified for meeting the repayment obligations and also the security arrangements. PACRA’s ratings are contingent on examining all the underlying documentation that gives effect to the purposed features of the instrument.
- 6. Page | 5 While all ratings follow an interactive process, the degree of interaction between the client and PACRA is considerably more in such ratings than in standard instrument ratings. Consistent with international practice, PACRA is also prepared to review various options of credit enhancement and advise the client on the preferred option for achieving the desired rating. Entity Rating: Entity rating signifies the entity’s level of credit risk and the capacity for timely payment of financial commitments to senior unsecured creditors. The risk level is indicated by the long and short term ratings. Insurer Financial Strength Rating: The insurer financial strength (IFS) rating represents an opinion of an issuer’s financial strength and business continuity from a policy holder's prospective. IFS rating capture the relative ability of the insurer to meet policy holders' obligations. However, the rating provides no guarantee against default but offers a well researched opinion as to the likelihood of the issuer to fail to fulfill its obligations towards policy holders. IFS rating is applicable to insurance obligations insofar as these are in compliance with the company's stated policies and procedures. Project Grading: The Project Grading (PG) is an opinion on a specific project being managed by any real estate entity. PG differentiates projects on the basis of their individual attributes; the concept is that projects of the same developer could have different grading; Although DG and PG have a high probability of linear relationship, this could break to merit a different rating for the project depending upon its unique characteristics. Fund Stability Rating: This is an opinion on the prospective relative stability in a fund’s return. The rating provides an objective measure as to the main areas of risk to which the income and money- market funds are exposed. The risk factors are: Credit Risk, Market Risk, Liquidity Risk, Returns Volatility, and Quality of Management and Support Systems. Star Ranking /Fund Performance Ranking: The Star Ranking measures performance of funds in a risk and returns combination, and then ranks the funds accordingly on the basis of their performance. The ranking is a quantitative measure and funds are rated within their respective categories. A fund’s particular ranking is computed with reference to its category and consequently, rankings are comparable only in the same category. Capital Protection Rating: Capital Protection Rating (CPR) is another rating class for mutual funds. CPR captures the relative extent to which principal invested in the fund is secure from loss at the time of maturity. CPR is not a view on the fund performance; it is concerned with the fund performance only insofar as it is imperative to meet the redemption of the principal amount at maturity. Asset Manager (AM) Rating: Asset Manager (AM) Rating provides investors with an independent opinion on the quality and expertise deployed by an asset management company and potential vulnerability to operational and investment management failures. AM Rating differs fundamentally from credit ratings, which refer to the ability to meet debt obligations.
- 7. Page | 6 The focus of AM rating is to gauge the fund management capability of the asset manager, as reflected from its operating platform, human resource base and the infrastructure that it has erected. AM rating gives a view on whether the asset manager meets or exceeds the overall investment management best practices, the benchmarks and standards in all criteria under review. Rating Methodologies PACRA‘s rating evaluation is reflected in its rating scale which is applicable to long-term and short-term ratings and is internationally recognizable. Fundamentally, the rating scale represents a decreasing order of risk. In determining the level of risk, a diverse range of complex data is collected and analyzed. This data is gathered primilary from the potential issuer or client and supplemented with strategic information obtained from outside independent, reliable sources. The rating process covers analysis of both quantitative and qualitative aspects including operations, finance, management and strategy. The factors considered by PACRA while forming its opinion include: Industry Risk: Industry risk is measured by the strength of the industry within the economy and relative to economic trends. This also includes the ease or difficulty of entering the industry, the diversity of earning base and role of regulation and legislation. The specific issues covered include: Economic importance of the industry Potential for support Employment significance Industrial relations record Significance of legislation: protective and harmful, relationship with Govt. Maturity of the industry International competition Barriers to entry Competitive situation domestically: monopoly, oligopoly, fragmentation Nature of the industry: capital intensity, product life spans, marketing requirements Cyclic factors: demand, supply, implications for price volatility Industry cost and revenue structure: susceptibility to energy prices, interest rate levels, Govt. policies Important developments and trends in the industry
- 8. Page | 7 Market Position: Market position covers the company’s market share in its major activities and the historical protection of its position and projected ability for the future. It also covers the company’s historical operating margins and its ability to maintain and improve them. The specific issues covered include: Competitive position within the industry: size, market share & trend, price setting-ability Major product importance Product lives and competition Degree of product diversification Significance of R&D expenditure and of new product development Geographic diversity of sales and production Significance of major customers Dependence on major suppliers and access of alternatives Marketing needs Distribution network, control and susceptibility to external factors Ownership and Support: The ownership structure of the company, financial strength of the owners, potential for support and other tangible benefits are covered in this area. The specific issues covered include: Ownership of the entity Relationship with owners Financial strength of owners Potential for support or for funds with drawls Structure of relationship Other benefits: access to technology products Access to capital markets
- 9. Page | 8 Management Evaluation: Management evaluation covers the record to date in operations and financial terms, corporate goals, attitude to risk, control system, experience and record control to peers. The specific issues covered include: Record to date in financial terms Corporate goals and outlook :aggressive stance , attitude to risk Experience , background , credibility Depth of management: key individuals, succession Record compared with peers Accounting Quality: This area covers an overall review of the accounting policies employed and consistency in their application. The specific issues covered include: Reporting and disclosure requirements Auditors and audit opinions Revenue recognition policies: long-term projects Stock valuation policies Fixed asset valuation method Goodwill and intangible treatment Undervalued assets , such as free hold property Debt/Equity hybrid instruments Depreciation methods, rates , lives Foreign currency treatment Deferred taxation policy Accounting for pension obligations Treatment of finance cost Contingent liabilities Overall aggressiveness or prudence of accounting presentation Unusual accounting policies , movements on reserves Changing in accounting policies Changes in group composition
- 10. Page | 9 Earnings: The key variables indicating the basic long-term earning power of the company are analyzed. Additionally, consistency and trend of core earnings , earning mix and capacity for internal growth are also covered. The specific issues covered include: Consistency and trend of core earnings Earnings mix by activity and geography Exceptional and extra ordinary items :non-recurring impacts on past earnings levels True earnings levels available for cash flow: equity accounting ,restrictions on profit respiration Internal growth verses acquired earnings Profitability and protection measures Profit margins Interest and pre-tax coverage measures Dividend cover, payment levels and future policy Taxation situation :effective tax rate specific reliefs, unutilized loses Sufficiency of retained earnings to finance growth internally Cash Flow: Relationship of cash flow to leverage and ability to internally meet all cash requirements is valued. The volatility of cash flow over time and the impact of seasonality on cash flow is also assessed. The specific issues covered include: Adequacy of cash flow to maintain the operating capacity of the business: working capital levels, replacement of fixed assets Contribution from cash flow towards expansion; major capital spending projects Discretionary spending included in cash flow including advertising, exploration, research and development expenditure Volatility of cash flow over time Relationship between cash flow and total debt Restrictions on cash flow: limits on respiration , potential taxation effects, access to dividends from subsidiaries Liquidity levels and fluctuations Working capital management and measurements
- 11. Page | 10 Capital and Debt Structure: The historic, present and projected gearing and leverage levels are analyzed. Sensitivity analysis is also carried out by varying critical assumptions for determining the cushion available for meeting future obligations in the event of adverse changes in business condition. The specific issues covered include: Gearing ratio measured: historic, present and projected Levering ratio measures: historic ,present and projected Sensitivity analysis on projected levels Seasonal variations in measures: core debt level Coverage measures on interest and leasing costs Necessary adjustments to measures for off balance sheet items: leased plant buildings, on-consolidated subsidiaries, guaranteed associates or joint ventures Appropriateness of capital structure for the business given the country concerned: overreliance on short term funding, sensitivity to interest rate charges Nature of underlying assets: ability to realize without loss, attraction to buyers in a forced sale, valuation methods and potential for moderation of gearing/leverage measures Debt structure :type, maturity, currency, service schedule, covenants, security, default clauses Funding and Flexibility: This area covers an evaluation of the company’s financing needs, plans and alternatives and its flexibility to accomplish its financing programme under stress impairing creditworthiness. The specific issues covered include: Flexibility of planned financial needs :capital spending, dividend levels, acquisitions Ability to raise additional financing under duress Back-up and stand by lines of credit: periods and covenants of underwriting facilities and committed lines ,bank relationships generally Ability to attract capital :shareholder make-up, access to equity markets Capital commitments
- 12. Page | 11 Margin of safety in present and planned gearing/leverage levels Asset make-up: nature of assets and potential for reductions or disposals under stress, salable units Off-balance sheet assets and liabilities: goodwill and other intangibles written off, undervalued assets, pension under funding Additional Factors for financial institutions: In case of credit rating of financial institutions, some additional key factors are: Quality if asset portfolio Stability of earning Source and cost of funds Capital adequacy and liquidity Market environment and planning Prospects and contingent liabilities Rating Process Credit rating is an interactive process relying primarily on information and interaction with the rater. It is supplemented with information obtained from outside independent sources. The entire process is aimed at evaluating financial strength of an entity to timely meet its financial obligations. PACRA follows a rigorous, objective and structured rating process at the onset of rating relationship to arrive at a rating opinion. The rating process, subscribes to rigorous quality standards. PACRA has developed comprehensive methodologies for different segments of entities – Banks, NBFCs, Insurance, AMCs, Corporate. We evaluate and analyze both qualitative and quantitative aspects and captures factors affecting the entity in the short-term and long- term. Our analyses broadly focus on ownership and governance structure of the organization, its management and control environment and evaluation of business and financial risks.
- 13. Page | 12 Steps in Rating Process PACRA’s ratings process is designed to ensure that all ratings are based on the highest standards of independence and transparency. At beginning of a new relationship, PACRA attempts to facilitate understanding of the rating process by sharing concise overview of PACRA and all steps involved in the process. The rating process progresses as follows – one step following the other until the finalization of the rating opinion: Mandate Letter Following a request from the entity / issuer for a rating, a mandate letter is sent to the client. Usually the processing time for sending the mandate is 1-2 working days on receipt of the request. Upon signing, mandate letter becomes a contractual agreement between the entity / issuer to be rated and PACRA to undertake a rating assignment. It has two separate mandates i.e. 1. Entity Rating Mandate 2. Fee Mandate These mandates explain all the terms and conditions governing the rating relationship. The mandate is perpetual in nature and valid unless terminated by either party with an advance notice. Rating Assignment Allocation The entity is allocated to one of PACRA's rating teams, each headed by a Unit Head. The Unit Head takes the responsibility of supervising the rating assignment and designate it to its rating team. The initial introductory letter or email is exchanged briefing the time line for completion of the rating assignment and other modalities. Meanwhile, both PACRA and rate furnish contact information on the designated liaison person (s) for ensuring
- 14. Page | 13 smooth and speedy communication. The respective sub team manager and analyst take care of all aspects of the rating assignment as per the PACRA's guidelines. Preliminary Analysis & Information Solicitation A Preliminary study is conducted with a careful review of an entity's published information. From this review, analysts determine what additional information and data are needed. A detailed questionnaire is sent to the client for soliciting the required financial & non-financial information over and above that provided in their financial statements and the notes to their accounts. Upon receipt of the information, an initial rating assessment is made and discussed internally based on findings of the rating team. This would be followed by a site visit and management meeting, preferably at entity's head office. Site Visit The respective rating team conducts entity's head office and/or plant visit. The objective of which is to develop a better understanding of the organizational structure, and quality of the process, and conduct interview of key department heads and establish a sense of control environment prevailing in the entity. A detailed itinerary in advance is sent for the said visit. Management Meeting The purpose of Management Meeting is to assimilate the strategic view of the entity’s top management The meeting is wide-ranging, covering the entity's ownership, governance, financial position, future prospects, the economic environment and many other issues that can have a bearing on the rating. The participants of the meeting include the respective rating team, Unit Head and members of apex rating committee from PACRA and the senior management of the client including the Chief Executive Officer. Before heading for the management meeting, a formal agenda is sent, highlighting the areas where we expect to have the views and opinions of the entity’s top management. We expect to have a formal presentation for this meeting covering, at a minimum, those areas highlighted in the agenda. Draft Rating Report Review Subsequent to the management meeting, a draft detailed rating report is sent to the entity's management for their feedback on completeness and accuracy of the information contained in the report. If the report containing anything which is confidential, the client is also expected to communicate the same. The feedback is expected from the entity within five working days. Rating Committee A multi-layered, decision-making process is followed in assigning a rating. In finalizing the rating, the relevant team prepares a rating proposal based on the information gathered through the questionnaire and discussion at the Management Meeting and head office/site visit. This is presented to the rating committee, comprising at least one apex, two permanent members and the rating team. The RC is usually conducted within one week following the management meeting. Pre-Publication Review Subsequent to the Rating Committee, PACRA provides rated entities with draft press release and one page summary report in advance for pre-publication review. This is to avoid issuing any credit analyses that contain misrepresentations or are otherwise misleading as to the general credit worthiness of an entity / issuer.
- 15. Page | 14 Rating Review Appeal Policy In case entity has disagreement with any of PACRA rating opinion – initial or surveillance – it has the option to appeal for review of rating opinion within 5 working days of the intimation of the rating action. The appeal process is covered by PACRA’s publicly available “Rating Review Appeal Policy”. Any disagreement with rating opinion does not restrict PACRA’s right to disseminate its updated opinion on public rating. Once reviewed, the rating opinion is final. If no written appeal for rating review is submitted within stipulated time, the rating is considered accepted by the entity’s management. Notification Once the rating has been finalized, it is formally notified to the entity / issuer. The rating notification is usually accompanied by a final set of rating report and press release. Public Dissemination In an initial rating assignment, the entity's management has the prerogative to make this rating public or keep it confidential. The management is expected to take this decision within five days of notification. In case, the entity decides to go for public dissemination. PACRA does so through its website and other electronic media. It provides all the benefits of a publicly available independent rating opinion of the entity. In case the rating is not made public, any selective disclosure would not be allowed. Once an initial rating of an entity is done and publicly disseminated, thereafter, as long as the rating mandate with PACRA remains outstanding, PACRA is duty-bound to inform the public of any change in the rating opinion and reserves the right to take such action without prior notice if so warranted by circumstances. PACRA attempts to achieve public dissemination of any updating opinion within two days of its notification. In case of public rating, PACRA, in addition to respective press release, disseminates the summary report through its website. However, the detailed report is made available against a nominal fee. Turnaround Time Through experience, we see a timeline spanning six-to-eight weeks to complete a rating assignment. However, the cooperation of the entity's management with PACRA in terms of expediting the response to our questionnaire and other requests for information (via timely and quality information), whenever deemed necessary and sought during the course of the rating process, aids greatly in facilitating the completion of the rating process within the planned duration. Surveillance Ratings, once notified, remain under surveillance at all times. It is an on-going and a continuous process in line with best practices. Under the mandate, ratings are kept under continuing surveillance from the date of notification. Relationship Termination Instrument rating, in normal circumstances, is withdrawn only when the rated instrument is redeemed. However, in extreme scenario of non availability of requisite information PACRA may withdraw instrument rating. The entity rating is withdrawn either on the client’s decision to withdraw or in extreme cases owing to reluctance by the client to provide the required information. PACRA may suspend rating where circumstances
- 16. Page | 15 prevent formation of rating opinion. In such cases PACRA makes all efforts to revive the rating at the earliest. The fact that the rating is currently withdrawn /suspended, along with the reason/s, is disseminated publicly. Rating Practices Confidentiality PACRA undertakes that all information, which entity does not desire to publicize, will be kept confidential and will be used only in the rating process and internal analysis. PACRA would forward the rating report to entity to ensure that no confidential information is contained therein/ or for comment in factual content before publication. We expect to receive the feedback within five working days. PACRA does not disclose confidential information obtained during the rating exercise to anyone under any circumstances. Beyond ethical considerations, there is a contractual written commitment by PACRA to each of its clients. Surveillance PACRA conducts surveillance in two forms i.e., ongoing surveillance and formal annual update. Once rating is accepted, the surveillance period starts immediately. Under surveillance, PACRA monitors the assigned rating on a continuous basis, wherein usually it is done on quarterly basis and in exceptional circumstances it may be done with higher frequency. PACRA performs at least one formal update during each 12-month period starting from initial notification. It is followed by a rating notification even if it remains unchanged. The annual update/surveillance process benefits from the established relationship developed in delivering the initial rating. It broadly follows the parameters established for initial rating assignment. Formal management meetings are held once a year. During surveillance, PACRA is duty-bound to inform the public of any change in the rating opinion. PACRA normally advises entity of any proposed rating action but reserves the right to take such action without prior notice if so warranted by circumstances. PACRA keeps in close touch with the entity to remain abreast of interim figures and any internal or external developments that may affect PACRA’s rating opinion. In on-going surveillance review, PACRA's analyst conducts monthly and quarterly surveillance of the rated entity. For this purpose, quarterly published / unpublished financial accounts are to be furnished for tracking the performance and detailed analysis.
- 17. Page | 16 Surveillance usually is carried out through phone calls and emails made to the entity by the relevant analyst. The phone calls, though conversational and casual, follow the highest standards of cordiality, etiquette, protocol, and professionalism. The frequency of the calls / emails is monthly or quarterly. In addition, PACRA regularly monitors a broad range of economic factors and trends that may impact on credit risk. When an event or deviation from an expected trend has occurred or is expected, additional information is solicited to keep the rating opinion relevant. Public Dissemination In an initial rating assignment, the entity's management has the prerogative to make this rating public or keep it confidential. The management is expected to take this decision within five days of notification. In case, the entity decides to go for public dissemination. PACRA does so through its website and other electronic media. It provides all the benefits of a publicly available independent rating opinion of the entity. In case the rating is not made public, any selective disclosure would not be allowed. Once an initial rating of an entity is done and publicly disseminated, thereafter, as long as the rating mandate with PACRA remains outstanding, PACRA is duty- bound to inform the public of any change in the rating opinion and reserves the right to take such action without prior notice if so warranted by circumstances. PACRA attempts to achieve public dissemination of any updating opinion within two days of its notification. In case of public rating, PACRA, in addition to respective press release, disseminates the summary report through its website. However, the detailed report is made available against a nominal fee. Policy on Withdrawal / Termination The validity of the rating mandate is in perpetuity until entity decides to terminate the rating relationship after giving at least one-month advance notice. During the currency of the rating mandate, PACRA's rating remains valid unless modified or withdrawn at PACRA's sole discretion and through a formal notification. However, in case of a confidential rating, such notice period is not required. Meanwhile, instrument ratings are normally withdrawn only when the rated instrument is redeemed. If
- 18. Page | 17 entity does not cooperate with PACRA to enable it to comply with its obligations, PACRA shall suspend the rating/withdraw from the engagement. In case of publicly disseminated rating, PACRA shall promptly notify this fact to the Securities & Exchange Commission of Pakistan and the public. Rating Review Appeal Policy In case entity has disagreement with any of PACRA rating opinion – initial or surveillance – it has the option to appeal for review of rating opinion. The appeal process is covered by PACRA’s publicly available “Rating Review Appeal Policy”. Any disagreement with rating opinion does not restrict PACRA’s right to disseminate its updated opinion on public rating. Conflict of Interest – Separation of Rating Team from Business Development PACRA has an explicit policy regarding exclusion of rating analysts from business development activities. Business Management, an independent department has been established; taking care of all new business origination and business relationships with rated entities including fee negotiations. Standard Rating Scale & Definitions ASSET MANAGER RATING SCALE & DEFINITIONS AM1: Asset manager meets or exceeds the overall investment management industry best practices and highest benchmarks in all criteria under review. AM2: Asset manager meets very high investment management industry standards and benchmarks with noted strengths in several of the rating factors. AM3: Asset manager meets high investment management industry standards and benchmarks. AM4: Asset manager demonstrates an adequate organization that meets investment management industry standards and benchmarks. AM5: Asset manager does not meet the minimum investment management industry standards and benchmarks.
- 19. Page | 18 CAPITAL PROECTION RATING SCALE & DEFINITIONS AAA (cp): Exceptionally Strong certainty Capital Protection. AA (cp): Very strong certainty of capital protection. A (cp): Strong certainty of protection. BBB (cp): Adequate certainty of capital protection BB (cp): weak capital protection DEBT INSTRUMENT RATING SCALE & DEFINITIONS LONG TERM RATINGS AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA: Very high credit quality. ‘AA’ ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A: High credit quality. ‘A’ ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB: Good credit quality. ‘BBB’ ratings indicate that there is currently a low expectation of credit risk. The capacities for timely payment of financial commitments are considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category. BB: Speculative. ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B: Highly speculative. ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, CC, C: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A‘CC’ rating indicates that default of some kind appears probable. ‘C’ ratings signal imminent default. SHORT TERM RATINGS A1+: Obligations supported by the highest capacity for timely repayment. A1:. Obligations supported by a strong capacity for timely repayment.
- 20. Page | 19 A2: Obligations supported by a satisfactory capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. A3: Obligations supported by an adequate capacity for timely repayment. Such capacity is more susceptible to adverse changes in business, economic, or financial conditions than for obligations in higher categories. B: Obligations for which the capacity for timely repayment is susceptible to adverse changes in business, economic, or financial conditions. C: Obligations for which there is an inadequate capacity to ensure timely repayment. D: Obligations which have a high risk of default or which are currently in default. FUND STABILITY RATING SCALE & DEFINITIONS AAA (f): A fund showing a consistently outstanding performance with very strong capacity to respond to future opportunities or stress situations. AA (f): A fund consistently outperforming its peers with strong capacity to respond to future opportunities or stress situations. A (f): A fund with stable performance generally in line with its peers with adequate capacity to respond to future opportunities or stress situations. BBB (f): A fund with performance comparable to peers but showing a relatively higher volatility and lower capacity to respond to future opportunities or stress situations. BB (f): A fund with a below average performance and limited capacity to respond to future opportunities or stress situations. INSUERER FINANCIAL STRENGTH (IFS) SCALE & DEFINITIONS AAA – Exceptionally Strong. Insurers assigned this highest rating are viewed as possessing exceptionally strong capacity to meet policyholder and contract obligations. For such companies, risk factors are minimal and the impact of any adverse business and economic factors is expected to be extremely small.
- 21. Page | 20 AA-Very Strong. Insurers are viewed as possessing very strong capacity to meet policyholder and contract obligations. Risk factors are modest, and the impact of any adverse business and economic factors is expected to be very small. A -Strong. Insurers are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small. BBB -Good. Insurers are viewed as possessing good capacity to meet policyholder and contract obligations. Risk factors are somewhat high, and the impact of any adverse business and economic factors is expected to be material, yet manageable. BB - Moderately Weak. Insurers are viewed as moderately weak with an uncertain capacity to meet policyholder and contract obligations. Though positive factors are present, overall risk factors are high, and the impact of any adverse business and economic factors is expected to be significant. B -Weak. Insurers are viewed as weak with a poor capacity to meet policyholder and contract obligations. Risk factors are very high, and the impact of any adverse business and economic factors is expected to be very significant. CCC,CC, C -Very Weak. Insurers rated in any of these three categories are viewed as very weak with a very poor capacity to meet policy holder and contract obligations. Risk factors are extremely high, and the impact of any adverse business and economic factors is expected to be insurmountable. A 'CC' rating indicates that some form of insolvency or liquidity impairment appears probable. A 'C' rating signals that insolvency or a liquidity impairment appears imminent. DDD, DD, D -Distressed. These ratings are assigned to insurers that have either failed to make payments on their obligations in a timely manner, are deemed to be insolvent, or have been subjected to some form of regulatory intervention. Within the DDD-D range, those companies rated 'DDD' have the highest prospects for resumption of business operations or, if liquidated or wound down, of having a vast majority of their obligations to policyholders and contract holders ultimately paid off, though on a delayed basis (with recoveries expected in the range of 90-100%). Those rated 'DD' show a much lower likelihood of ultimately paying off material amounts of their obligations in a liquidation or wind down scenario (in a range of 50-90%). Those rated 'D' are ultimately expected to have very limited liquid assets available to fund obligations, and therefore any ultimate payoffs would be quite modest (at under 50%).
- 22. Page | 21 REAL ESTATE PROJECT GRADING SCALE & DEFINITIONS PG1: Very strong project execution capacity. The prospects of execution of the real estate project as per plan are the most promising and the ability to transfer ownership as per terms is the highest. PG2: Strong project execution capacity. The prospects of execution of the real estate project as per plan and the ability to transfer ownership as per terms are highly promising. PG3 Good project execution capacity. The prospects of execution of the real estate project as per plan and the ability to transfer ownership as per terms are good. Project execution capacity can be affected moderately by changes in the real estate sector prospects. PG4: Adequate project execution capacity. The prospects of execution of the real estate project as per plan and the ability to transfer ownership as per terms provide adequate comfort. Project execution capacity can be affected severely by changes in real estate sector prospects. PG5: Weak project execution capacity. The prospects of execution of the real estate project as per plan and the ability to transfer ownership as per terms are poor. Contact Information PostalAddress The Pakistan Credit Rating Agency Limited (PACRA) FB1 Awami Complex Usman Block, New Garden Town Lahore Phone: +92 42 3586 9504 - 6 Fax: +92 42 3583 0425 Rating Relationship PACRA is committed to providing the highest level of service. Support from our dedicated professionals is a phone call away during the business week. If you like to learn more about our products and services, please contact Ms. Samiya Mukhtar
- 23. Page | 22 Manager – Business Development +92 42 3586 9504-6 samiya@pacra.com Ratings PACRA welcomes discussions on its rating opinions. These help in enhancing the understanding and help the users in appreciating the depth of analysis supporting such analysis. For all ratings inquiries, please contact Mr. Jhangeer Hanif Unit Head (Ratings) +92 42 3586 9504-6 jhangeer@pacra.com Mr. Rana Muhammad Nadeem Unit Head (Ratings) +92 42 3586 9504-6 nadeem@pacra.com