Assignment No 3

Financial Institutions
Pakistan credit rating agency

Submitted By: Haider Ahmed Qazi SP09-BBA-095

1/10/2012

Comsats Institute of Information and Technology

What is PACRA?
PACRA stand for Pakistan Credit Rating Agency. The primary function of PACRA is to evaluate the capacity and willingness of a corporate entity to honor its debt obligations. PACRA ratings reflect an independent, professional and impartial assessment of the credit risk associated with a particular debt instrument or a corporate entity. By providing a measurement of risk, PACRA's ratings facilitate investors in making prudent investment decisions after determining the acceptable rate of return at the given risk level. However, regardless of the type of rating, it is not a 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. PACRA was established in 1994 as a joint venture among IBCA Limited (the international credit rating agency), International Finance Corporation (IFC) and the Lahore Stock Exchange. The first credit rating agency in Pakistan, PACRA is widely acknowledged for its professionalism and integrity. To date, PACRA has completed well over a hundred ratings, including major industrial corporate, financial institutions and debt instruments. In addition to local ratings, PACRA has also successfully completed two international rating assignments in collaboration with Fitch. 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. Another credit rating agency working in Pakistan is JCR-VIS Credit Rating Co. LTD it also do rating similar to PACRA along it also do currency ratings. VIS is a credit rating company which is now working with JCR and they combine doing ratings. There rating processes end in almost 8 weeks. Companies pay the credit rating agencies for doing their ratings.

PACRA rating Methodologies

There is mostly similar method but different factors through which rating is being done for various sectors and industries. There is a bank rating methodology, corporate rating methodology, insurance rating methodology, structured finance rating methodologies, Asset manager rating methodology, mutual fund rating methodology, real estate grading methodology different elements which are checked mostly are industry risk , market position, Ownership and support, earning and performance, cash flow, management evaluation, capital and debt structure, funding and flexibility, corporate governance and other risk factors are checked before assigning a rating scale to the companies. PACRA rating scale is told as below.

RATING SCALE OF (PACRA)

LONG TERM RATING SHORT TERM RATING

AAA: Highest credit Quality AA: Very high credit quality A: High credit quality BBB: Good credit quality BB: Speculative B: Highly speculative CCC, CC, C: High Default risk

A1+: Highest Timely repayment A1: Strong timely repayment A2: Satisfactory timely repayment A3: Adequate timely repayment B: Susceptible timely repayment C: Inadequate timely repayment D: High risk default

RATING PROCESS OF (PACRA)

PACRA rating process begins with a careful review of an entity's published information. From this review, analysts (normally two, the lead and support analyst, are assigned to each rating

assignment) determine what additional data are needed and a detailed questionnaire is sent to the client. An initial rating assessment is made and discussed internally. A discussion agenda is then prepared for a meeting with the client company's senior management. The meeting is wideranging, covering the company's financial position, earning trends, operating practices, competitive standing, future prospects, the economic environment and many other issues that can have a bearing on PACRA's assessment. In order to ensure full understanding of their position, companies entrust PACRA with confidential information, which is not disclosed in rating reports but which is certainly taken into account when assigning the ratings. In determining the initial ratings for an institution, a rating proposal is prepared based on the information gathered at the Management Meeting with the company, and is presented to the rating committee (comprising the Chairman, Managing Director, senior executives and the lead analyst). A draft rating report is then prepared and sent to the client for verification of the accuracy and confidentiality of the information in the report. Upon the client's approval, the onepage summary of the report is made public and a press release of the assigned rating is issued. The detailed rating report is sent to the client. Rating Watch: As and when any significant changes take place, the existing rating is placed on Rating Watch'. The rating is then upgraded, downgraded or maintained after assessing the impact of any such change

Rating of five Companies of Pakistan Companies Date Long term rating short term Rating

Fazal Cloth Mills Limited Hussain Mills Limited Ibrahim Fibers Limited Nishat Mills Limited Prosperity Weaving Mills Ltd Sapphire Fibers Limited

24-Aug-11 30-Jan-12 05-Jul-11 23-Feb-11 30-Nov-11 26-May-11

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A2 A2 A1+ A1+ A2 A2