Insight
Volume I - No. 15
Notched-up ratings display high stability
R. Balasubramanian [email protected]
An in-house study shows that CRISIL's ratings that have been notched- up for parent support in the last two years have not witnessed a single incidence of default. Moreover, in terms of stability, their behaviour is comparable to that of non-notched-up ratings.
According to CRISIL, the observed rating behaviour demonstrates the robustness of its criteria and the holistic framework that it has adopted in assessing the degree of parent or group support assignable to a subsidiary or an affiliated entity. Moreover, in CRISIL's opinion, this is an encouraging indicator for both issuers, who have the opportunity to leverage on the strength of a stronger parent or group, and for investors and lenders, who set store by the parent company's credentials in lending to subsidiaries.
CRISIL notches-up ratings for parent/group support based on the practical experience that an entity's creditworthiness is not only dependent on its own business and financial strengths but also on its lineage and the relationship that it enjoys with its parent or other group companies. To capture the benefits that flow to a company from a credit perspective, CRISIL employs a comprehensive framework. This framework attempts to capture the incentives for a parent to support its subsidiary on an ongoing basis as well in times of distress. This is objectively assessed through a set of economic and moral factors that induce a parent to extend support.
Notched-up ratings marked by robust stability
CRISIL evolved its comprehensive notch-up criteria for parent and group-supported ratings in mid-1999. It recently carried out an in- house study of the stability of such ratings over the two-year period from January 2001 to January 2003. In terms of each rating category, notched-up 'AAA' ratings exhibited 94% average one-year stability.
This means that 94% of the notched-up 'AAA' ratings remained at 'AAA' at the end of one year, which is comparable with the behaviour of non-notched-up ratings in the same category. Similarly, notched-up 'AA' category ratings exhibited 93% stability during the same period.
This also compares well with the stability of non-notched-up ratings in the same category. In fact, on an overall basis, the stability of notched-up ratings is comparable with those of the non-notched-up ratings. The list of notched-up ratings is given in Table 1.
Parent rating is the key driver
As in most ratings, in notched-up ratings too, the issuing entity's own performance and credit profile is a relevant factor. But the behaviour and stability of notched-up ratings in most cases are sensitive to the parent company's creditworthiness and the intensity of the linkages between the parent and the subsidiary than to the stand-alone performance of the subsidiary.
CRISIL has, in fact, observed many instances where a subsidiary's credit rating has been affected primarily because of a change in the parent's credit profile. The rating of a subsidiary could witness an upward or downward movement even when its stand-alone credit
profile has not undergone a change. This is because the parent rating is one of the crucial elements that has a bearing on the subsidiary's final rating.
Framework for assessing support
CRISIL was the first rating agency in India to develop and publish the criteria for notching-up ratings1 . In line with its expectations while assigning the rating, CRISIL has observed many parent companies stepping in to provide support to their subsidiaries when in need.
Typically, the parent or group extends business and financial support such as capital infusion, managerial and operational inputs and product and marketing assistance. Such support helps the subsidiary to augment its business position and/or improve its financial risk profile.
CRISIL has developed separate rating criteria for parent-subsidiary linkages, group linkages and linkages with the government (government of India and state governments). The relevant criterion is applied while evaluating the issuer's credit profile. While the underlying principle is common, the differences in the assessment parameters used stem from the differential manner in which CRISIL expects several owners to respond to a distress situation in their subsidiary or affiliate company. The list of factors considered for notching-up is given in Exhibit 1.
Translating international ratings for assessing parent support:
Irrespective of whether the parent is a domestic or multinational company, the basic approach of notching-up for parentage remains the same. However, to assess the creditworthiness of a multinational parent, CRISIL considers Standard & Poor's (S&P) rating of the parent.
CRISIL uses a hybrid approach to map S&P's rating scale to its own scale. The mapping is primarily based on default and transition rates on the S&P scale and comparable rates on the CRISIL scale. These mappings are fine-tuned and updated periodically based on default and transition statistics. According to the current mapping, a rating of 'A' and higher than 'A' on the S&P scale would translate to a 'AAA' rating on the CRISIL scale. A similar mapping has been evolved for other rating categories on the CRISIL scale.
1See the article, Notching-up for Parent Support in CRISILs Insight published in August 1999.
Apart from assessing the credit profile of the multinational parents, CRISIL also looks at the regulatory issues that could constrain the multinational companies in bringing funds into India in times of necessity. This aspect is critical as timely infusion of funds by the parent becomes essential in certain circumstances in enabling its Indian subsidiary to meet its debt obligations on time. Where necessary, CRISIL also directly discusses with the international parent
to assess its approach and philosophy towards supporting the subsidiary.
The effectiveness of the notch-up criteria reflects CRISIL's analytical strength in assessing and capturing risks. Nonetheless, CRISIL would on an ongoing basis keep evaluating the efficacy of the notch-up criteria, and if required, refine its analytical framework.
Exhibit 1
Notching-up for Parent/Group Support
The framework measures the extent of integration between a parent and its subsidiary or between group companies. The extent of integration has an impact on the support available on an ongoing basis and in times of distress. By analysing various factors, which are broadly classified into aspects that constitute the economic rationale and moral obligations to extend support, the extent of integration is assessed.
Besides, the framework takes into account instances of demonstrated support by the parent in the past and its stated posture for the same in future.
Key Factors Considered While Notching-up for Parent/Group Support Economic rationale
Strategic importance of the subsidiary / relevance of the entity to the group
Size of investments by the parent relative to its balance sheet size and its other investments
Extent of holding by the parent / group
Economic incentive to the parent / group Moral obligations
Extent of management control
Shared name / common logo for group companies
Domiciliary status / commonality of resources
Management's stated posture Notching-up for Government Support
CRISIL classifies the relationship between the government and the government-owned entity based on policy role and implications of default.
While the former seeks to assess whether the entity acts as the government's policy tool, the latter seeks to assess the likely moral, political or economic pressure on the government if the entity were to default on its debt obligations. This classification is critical in determining the likely degree of support, which in turn has a bearing on the extent of notching-up of the stand-alone rating. Government-owned entities are classified as follows:
Limited policy role of the entity with no repercussions of default Limited policy role but very adverse impact of default Policy-based institutions having no repercussions of default Policy-based institutions having very adverse impact of default Key Factors Considered While Assessing the likelihood of Government Support
Policy role
Strategic importance of the entity to the government
Moral obligations/Implications of default
Political implications of default by the entity
Domino effect
Public perception of sovereign backing
Stated posture of the government
Table 1. Notched-up Issuer Ratings
Issuer CRISIL Rating2 of Issuer notched up for Outstanding CRISIL /
Issuer in public Parent/Group/Government S&P Rating of Parent in
domain public domain
Addison & Company Limited FAA-/P1+ Simpson & Company Limited
Allied Domeq Spirits & Wine
(India) Private Limited P1+ Allied Domecq PLC S&P [BBB+/Negative/A-2]
Ambuja Cement Eastern Limited P1+ Gujarat Ambuja Cements Limited CRISIL [AA+/P1+]
Ashok Leyland Finance Limited AA-/FAA/P1+ Ashok Leyland Limited CRISIL [AA-/P1+]
Asian PPG Industries Limited P1+ Asian Paints (India) Limited & CRISIL [AAA/P1+] &S&
PPG Industries Inc. P [A/Negative/A-1]
Associates India Financial Services Limited AAA/P1+ Citigroup Inc. S&P [AA-/Stable/A-1+]
Atlas Copco (India) Limited FAAA/P1+ Atlas Copco AB S&P [A-/Stable/A-2]
Aventis Pharmaceuticals Limited P1+ Aventis S.A. S&P [A+/Positive/A-1]
Bajaj Auto Finance Limited FAAA/P1+ Bajaj Auto Limited CRISIL [AAA/FAAA/P1+]
Bank of Baroda AA+ Government of India
Bank of India AA+/P1+ Government of India
BASF India Limited AAA/FAAA/P1+ BASF AG S&P [AA-/Stable/A-1+]
BASF Industries (Private) Limited P1+ BASF AG S&P [AA-/Stable/A-1+]
Bayer India Limited P1+ Bayer AG S&P [A+/Negative/A-1]
Berger Auto & Industrial Coatings Limited P1+ Berger Paints India Limited CRISIL [FAA+/P1+]
Bharat Electronics Limited P1+ Government of India
BOB Housing Finance Limited AA Bank of Baroda CRISIL [AA+]
BOC India Limited AA/FAA+/P1+ BOC Group PLC (The) S&P [A/Stable/A-1]
Canara Bank AA+ Government of India
Canbank Factors Limited AA/FAA+/P1+ Canara Bank CRISIL [AA+]
Cargill India Private Limited P1+ Cargill Inc. S&P [A+/Stable/A-1]
Carrier Aircon Limited P1+ United Technologies Corp. S&P [A/Stable/A-1]
Cent Bank Home Finance Limited FAA- Central Bank of India
Cholamandalam Investment &
Finance Company Limited FAA/P1+ Murugappa group
Ciba Specialty Chemicals (India) Limited P1+ Ciba Specialty Chemicals Holding Inc. S&P [A/Stable/A-1]
Citicorp Finance (India) Limited AAA/P1+ Citigroup Inc. S&P [AA-/Stable/A-1+]
Citicorp Maruti Finance Limited AAA/P1+ Citigroup Inc. S&P [AA-/Stable/A-1+]
Coal India Limited AA/P1+ Government of India
Corpbank Homes Limited FAAA Corporation Bank CRISIL [AAA/FAAA/P1+]
Corporation Bank AAA/FAAA/P1+ Government of India
2Outstanding CRISIL long-term, fixed deposit and short-term ratings as of September 2003
Damodar Valley Corporation AA- Government of India
Deutsche Securities India Private Limited P1+ Deutsche Bank AG S&P [AA-/Negative/A-1+]
DHFL Vysya Housing Finance Limited FAA- Dewan Housing Finance Limited
E.I. DuPont (India) Private Limited P1+ Dupont (E.I.) De Nemours & Company S&P [AA-/Negative/A-1+]
Electrolux Kelvinator Limited P1+ Electrolux AB S&P [BBB+/Stable/A-2]
Electronics Corporation of India Limited P1+ Government of India
Export Import Bank of India AAA/FAAA/P1+ Government of India
FAG Bearings India Limited P1+ FAG Kugelfischer Georg Schafer AG
Ford Credit Kotak Mahindra Limited A+/P1+ Ford Motor Credit Co. S&P [BBB/Negative/A-2]
Ford India Limited P1+ Ford Motor Company S&P [BBB/Negative/A-2]
GE Capital Services India AAA/P1+ GE Capital Corporation S&P [AAA/Stable/A-1+]
GE Countrywide Consumer
Financial Services Limited P1+ GE Capital Services India Limited CRISIL [AAA/P1+]
GE Motors India Limited P1+ General Electric Co. S&P [AAA/Stable/A-1+]
GE Power Controls India Private Limited P1+ General Electric Co. S&P [AAA/Stable/A-1+]
Gestetner (India) Limited P1 Ricoh Co. Limited S&P [A/Stable/A-1]
Global Trade Finance Private Limited AA/P1+ WestLB AG S&P [AA/Negative/A-1+]
GMAC-TCFC Finance Limited P1+ General Motors Acceptance Corp. S&P [BBB/Negative/A-2]
Godrej Sara Lee Limited P1+ Sara Lee Corp. S&P [A+/Stable/A-1]
Gruh Finance Limited AA/FAA+/P1+ Housing Development Finance CRISIL [AAA/FAAA/P1+]
Corporation Limited
Gujarat Gas Company Limited AAA British Gas PLC S&P [A/Stable/A-1]
Henkel Spic India Limited P1+ Henkel KgaA S&P [A+/Stable/A-1]
Hero Honda Finlease Limited AA+/FAAA/P1+ Hero group
Highway Cycle Industries Limited P1+ Hero group
Hind Lever Chemicals Limited P1+ Hindustan Lever Limited CRISIL [AAA/P1+]
Hindustan Aeronautics Limited AAA/P1+ Government of India
Housing and Urban Development
Corporation Limited AA-/FAA/P1+ Government of India
IBP Company Limited P1+ Indian Oil Corporation
ICICI Securities & Finance
Company Limited P1+ ICICI Bank Limited CRISIL [AAA/FAAA/P1+]
India Pistons Limited A+/FAA-/P1+ Simpson & Company Limited
Indian Aluminium Company Limited AAA/FAAA/P1+ Hindalco Industries Limited CRISIL [AAA/P1+]
Indian Explosives Limited P1+ Orica Limited S&P [BBB+/Stable/A-2]
ICI India Limited CRISIL [P1+]
Indian Overseas Bank AA/P1+ Government of India
Indian Petrochemicals Corporation Limited AA/FAA+/P1+ Reliance Industries Limited CRISIL [AAA/P1+]
Indian Railway Finance Corporation Limited AAA Government of India
Industrial Development Bank of India AA+ (Rating Watch Government of India
with developing implications)/FAAA/P1+
Infrastructure Development Finance AAA/P1+ Government of India
Company Limited
ING Vysya Bank Limited AA+ ING Groep N.V. S&P [A+/Stable/A-1]
INOX Air Products Limited P1+ Air Products & Chemicals Inc. S&P [A/Stable/A-1]
Insilco Limited AA- Degussa AG S&P [BBB/Stable/A-2]
J.P. Morgan Securities (India) Private Limited P1+ J.P. Morgan Chase & Co. S&P [A+/Negative/A-1]
JM Morgan Stanley Securities Private Limited P1+ Morgan Stanley S&P [A+/Stable/A-1]
Johnson & Johnson Limited AAA/P1+ Johnson & Johnson S&P [AAA/Stable/A-1+]
Kochi Refineries Limited P1+ Bharat Petroleum Corporation Limited CRISIL [AAA/FAAA/P1+]
Kotak Mahindra Capital Company Limited P1+ Kotak Mahindra Bank Limited CRISIL [FAAA/P1+]
Lafarge India Private Limited AA-/P1+ Lafarge S.A. S&P [BBB/Stable/A-2]
Lakshmi General Finance Limited FAA+/P1+ Sundaram Finance group ---
Lanco Kalahasthi Castings Limited P1+ Electrosteel Castings Limited CRISIL [AA+/P1+]
LIC Housing Finance Limited AAA/FAAA Life Insurance Corporation of India ---
Lucas Indian Service Limited FAAA/P1+ Lucas TVS Limited CRISIL [FAAA]
Madras Aluminium Company Limited, The P1+ Sterlite Industries (India) Limited CRISIL [AA-/P1+]
Mahindra and Mahindra Financial
Services Limited AA/FAA/P1+ Mahindra & Mahindra Limited CRISIL [AA/P1+]
Narmada Cement Company Limited P1+ Larsen & Toubro Limited CRISIL
[AA+/FAAA (Rating Watch with developing implications)/P1+]
National Bank for Agriculture and AAA Reserve Bank of India/
Rural Development Government of India
National Highways Authority of India AAA Government of India
National Hydroelectric Power
Corporation Limited AA+ Government of India
National Thermal Power Corporation Limited AAA/FAAA/P1+ Government of India
Nestle India Limited P1+ Nestle S.A. S&P [AAA/Negative/A-1+]
Neyveli Lignite Corporation Limited AAA Government of India
Novartis (India) Limited P1+ Novartis AG S&P [AAA/Stable/A-1+]
Nuclear Power Corporation of India Limited AAA Government of India
Numaligarh Refinery Limited P1+ Bharat Petroleum Corporation Limited CRISIL [AAA/FAAA/P1+]
Oriental Bank of Commerce AA+/FAAA/P1+ Government of India
Parke-Davis (India) Limited P1+ Pfizer Inc. S&P [AAA/Stable/A-1+]
Parrys Confectionery Limited A- Murugappa group ---
Pfizer Limited P1+ Pfizer Inc. S&P [AAA/Stable/A-1+]
Philips India Limited AA/P1+ Koninklijke Philips Electronics N.V. S&P [BBB+/Stable/A-2]
PNB Gilts Limited P1+ Punjab National Bank
PNB Housing Finance Limited AA/FAA+/P1+ Punjab National Bank
Power Finance Corporation Limited AAA/FAAA/P1+ Government of India
Power Grid Corporation of India Limited AAA Government of India
Rabo India Finance Private Limited AAA/P1+ Rabobank Nederland S&P [AAA/Stable/A-1+]
Reckitt Benckiser (India) Limited AAA/P1+ Reckitt Benckiser PLC S&P [A/Stable/A-1]
Rural Electrification Corporation Limited AAA/P1+ Government of India
Saint Gobain Glass India Limited P1+ Compagnie de Saint-Gobain S.A. S&P [A/Negative/A-1]
SBI Cards & Payment Services (P) Limited P1+ State Bank of India CRISIL [AAA]
Siemens Limited AAA/P1+ Siemens AG S&P [AA-/Stable/A-1+]
Siemens Public Communication Networks Limited AAA/P1+ Siemens AG S&P [AA-/Stable/A-1+]
Small Industries Development Bank of India AA+/FAAA Government of India
Sony India Private Limited P1+ Sony Corp. S&P [A+/Negative/A-1]
State Bank of Indore FAA/P1+ State Bank of India CRISIL [AAA]
ST-BSES Coal Washeries Limited AA BSES Limited CRISIL [AAA/P1+]
Sunbeam Auto Limited P1+ Hero group
Tamilnadu Industrial Development FA+ Government of Tamil Nadu
Corporation Limited
Tamilnadu Power Finance & Infrastructure
Development Corporation Limited FA+ Government of Tamil Nadu
Tamilnadu Transport Development Finance FA+ (under notice of Government of Tamil Nadu
Corporation Limited withdrawal)
Tata BP Solar India Limited AA/P1+ BP PLC S&P [AA+/Stable/A-1+]
Tata Finance Limited BBB/FA- Tata group
Tata Industries Limited AA/P1+ Tata group
Tata Motors Limited AA/P1+ Tata group
Tata Technologies Limited AA/P1+ Tata Motors Limited CRISIL [AA/P1+]
Tata Yadogawa Limited FAA/P1+ Tata group
TI Diamond Chains Limited P1+ Murugappa group
Tube Investments of India Limited AA/P1+ Murugappa group
UDV India Limited P1+ Diageo PLC S&P [A+/Negative/A-1]
Union Bank of India AA+/FAAA (under Government of India
notice of withdrawal)
Vibank Housing Finance Limited FAA Vijaya Bank CRISIL [AA]
Vijaya Bank AA Government of India
Vinyl Chemicals (India) Limited P1+ Pidilite Industries Limited CRISIL [P1+]
Whirlpool of India Limited P1+ Whirlpool Corp. S&P [BBB+/Negative/A-2]
Wockhardt Life Sciences Limited A (Rating Watch with Wockhardt group
negative implications)