Policy for Surveillance and Review of Ratings

Policy for Surveillance and Review of Ratings

Surveillance

Beacon Ratings will track developments that might affect the credit risk of an entity/ issuer or debt instrument after initial rating. The goal is to keep the rating current by identifying issues that may result in either an upgrade or a downgrade.

All accepted ratings shall be reviewed on an ongoing basis till the maturity of the financial instrument.Formal surveillance of accepted ratings shall be carried out after publication of annual audited results, unless regulatory requirements stipulate it to be more frequently.

The frequency and extent of surveillance typically depends on specific risk considerations. During the surveillance, Financial Analysts will have periodic meetings with senior management to discuss how the following issues are affecting revenues and operating costs:

• Changes in the issuer/ entity’s operating plans.
• Developments in credit risk, market risks, operating risks etc.
• Other factors or assumptions affecting issuer/ entity’s creditworthiness.
• Operating and financial performance.
• Economic environment in which issuer/entity operates.
• Changes in the business climate, market, technology, competition and regulation.

Broadly, the annual update/surveillance process benefits from the established relationship developed in delivering the initial rating, and follows the parameters established for initial rating assignment. Formal management meetings are held once a year.

Surveillance mechanism

The surveillance process requires the Financial Analysts to maintain periodic contact with the issuers/ entities to collect the required information. Steps in the rating surveillance process include:

• Communicating with the issuer/entity at regular intervals to understand developments and trends in performance to help Analysts compare company performance against their own and the company’s expectations, as well as against peers.
• Checking the status of issues that may affect the entity’s credit quality (such as an initial public offering or follow-up public offering), exploring the probability of such issues arising in the near future and assessing the management’s perspective on such issues.
• Discussing financial performance with the entity on the declaration of interim financial results.
• Understanding strategic plans or new initiatives that could have rating implications.

Surveillance also enables analysts to stay abreast of current developments, to discuss potential problem areas, be apprised of any changes in the entity’s plans, and to distinguish between realistic and over-optimistic management expectations.Ratings are subject to change at any point in time, based on changes in the business profile or financial profile of the issuer, or the prospects for the industry in which the issuer operates.

Surveillance is usually carried out through phone calls and emails. 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.

Review of ratings

Monthly declaration from client: Beacon Ratings on the first day of each month shall obtain a ‘No Default’ declaration from clients or a declaration giving details of any delay/default in debt servicing. In case of any delay/default, the Analysts should immediately conduct a review and place before the Rating Committee for a rating decision, if warranted. Such a rating decision or a rating revision on account of receipt of an information of default/delay from the Debenture Trustee/Bankers of the rated entity shall be disseminated through Press Release within the two working days from the date of receipt of such information.

Analyst shall take utmost care in tracking the repayment of borrowing/principal or payment of interest on the rated instruments/facilities. The Default shall be recognised as per Beacon Ratings’Policy for recognition of default, as detailed in the Operating Manual.

Quarterly reviews:Quarterly reviews are quick reviews conducted internally by Beacon Ratings and wherever necessary cases warranting special attention shall be taken for detailed review and taken up at the Rating Committee meeting. Quarterly review notes prepared by Rating Analysts shall cover the following areas:

• Financial results of the issuer/ entity for the quarter.
• Any major expansion plans or execution of new projects.
• Any significant changes in policies, plans or operations of the company.
• Any significant changes in the industry front.
• Debt servicing history during the quarter

Quarterly review of ratings shall be triggered by the quarterly results published by the entities. Where such results are not available (mainly in case of unlisted companies), Financial Analysts shall undertake performance review through dialogue with CFO or other responsible officers of such entities. The Financial Analysts shall send a formal communication to all issuers/ entities requesting for details of quarterly results. After receipt of the information, the Financial Analysts shall verify and analyse the data and seek additional information, if required to monitor the rating. The review report shall be finalised by the Chief Rating Officer.

Annual reviews:Annual surveillance exercise is a detailed review of the issuers/ entities performance since the previous rating involving management meeting and preparation of detailed review report. Annual reviews shall be carried out after publication of audited annual financial statements and shall be completed within a maximum period of 2 months from the date of publication of annual reports. In case of any delay in conducting the annual review, Beacon Ratings shall promptly disclose on its websites the details of all such ratings mentioning therein the name, nature/type of debt instrument/facility, size, date of last review, reasons of delay and the same shall hyperlinked to the last Press Release.

The broad outline of these reviews shall involve:

• Analysing the financial performance of the entity in the last financial year vis-à-vis that of in the earlier financial year and projected performance.
• Tracing the effects of various developments in the business.
• Assessing any concern on governance.
• Analysing the impact of any change in management policy or vision

Similar to the initial rating, Beacon Ratings will issue Rating Rationale and Press Release for surveillance of ratings. The dissemination through Press Release shall be made within five (5) working days from the date of the Rating Committee meeting.

Special reviews: Beacon Ratings may initiate a special review of rating any time when circumstances so warrant or on the happening of material events requiring a review. Under such circumstances, Beacon Ratings may place the rating under rating watch till the review is completed. Rating watch to indicate that an event has occurred or there is deviation from the expected trend that has increased the probability of rating change and additional information is necessary to take rating action. The Press Release pertaining to such review shall be disseminated within seven (7) working days from the date of occurrence of such event.

The requirement of ensuring periodic surveillance until the rating is withdrawn and the publication of surveillance reports signal to the market that the rating is current and accurate, and can be relied upon for investment/lending decisions.

Appeal post-surveillance

In case of surveillance of rating, the issuer/entity does not have the right to not accept the rating; however, the entity/issuer may seek a review of the rating assigned based on surveillance.

Non-cooperation by the issuer

In the event of non-cooperation by the issuer/ entity (such as, not providing the information required for review/surveillance of rating and non-payment of annual surveillance fee), Beacon Ratings shall carry out the review/surveillance exercise on the basis of best available information in public domain or otherwise.

In such cases of lack of co-operation, if the rating has been assigned based on the best available information, investors shall be advised of the fact that the rating is based on the best available information and the rating symbol shall accompany the suffix “issuer not cooperating”, and accordingly published as such. Such suffix shall be read as ‘Issuer did not cooperate, rating report based on best available information’.

Withdrawal of rating

The rating already assigned and existing in the public domain shall be withdrawn as per the Policy on Withdrawal of Rating of Beacon Ratings, as contained in the Operating Manual.

Publication of rating

Issuers/entities are usually advised of any proposed rating action, but Beacon Ratings reserves the right to take such action without prior notice to the issuer/ entities if it is warranted by circumstances.