GCR Rating’s Process Snapshot
The rating process is structured to create an accurate, consistent framework for evaluating and ranking risk across various companies, industries and types of debt. The objective is to achieve a reasonable judgement on credit risk, not through a set formula, but rather through careful analysis of the critical strategic issues affecting individual organisations. GCR’s main emphasis is to understand the fundamental strategic factors associated with each individual organisation and the industry in which it operates, to evaluate the quality of management, and to identify critical risks to future cash generation. Our emphasis is on determining how these strategic aspects will affect the predictability of cash generation and the organisation’s capacity to respond to uncertainty.
GCR starts the process by completing a ‘preliminary’ analysis, as outlined in points A and B below.
A. Industry analysis
- Compilation of industry financial statistics.
- An overview of the industry covering aspects such as the nature of value creation, barriers to entry, regulatory trends, vulnerability to economic cycles and input costs.
- An assessment of the key strategic features driving the industry.
- An assessment of the competitive position and market share of all the key players.
B. Company analysis
The second step is to complete the analysis on the specific company. Our initial requirements focus on the following:
- Audited financial statements for the past five years and management accounts for the year to date.
- A synopsis of key policy guidelines in respect of credit, liquidity, interest rate and counterparty risk.
- Various statistical breakdowns of the income and asset base.
- Future prospects, plans and budgets.
In order to facilitate the gathering of information necessary to complete the preliminary analysis, GCR will forward management our standard Rating Questionnaire, which addresses some of the more in depth and often not publicly available information, specifically tailored by industry sub-sector. In addition to this, the Rating Questionnaire outlines the subjects to be reviewed during the due diligence visit.
The written answers and relevant documents requested in the questionnaire should be received prior to GCR’s meetings with management. This enables the analysts involved to gain a thorough understanding of the organisation’s fundamentals and identify the specific issues to be discussed in the due diligence meetings.
C. Due diligence and dissemination
Upon completion of our preliminary analysis we will require time with the organisation’s senior executives. This is in order to clarify any queries that have arisen during the preliminary analysis, as well as to discuss other pertinent issues such as the organisation structure, risk management philosophies and procedures, the control environment, financial forecasts and expansions plans, accounting polices and strategic direction.
Upon completion of the rating report it will first be forwarded to management for perusal and comment. Upon accordance of the rating the organisation will be advised accordingly and the report returned to management. Once management authorise us to publicly release the rating , the rating report (duly edited to remove any confidential information that is not for public dissemination) will be disseminated to subscribers. GCR regularly reviews all its ratings, incorporating an annual due diligence exercise.
D. Time taken to complete the exercise
Typically it takes 6 - 8 weeks from date of signature of the rating contract to final completion of the rating report and notification of the rating. This assumes that management timeously provides GCR with its information requirements.
E. Regular review
Once a rating has been publicly released, GCR will continuously monitor the company’s performance. GCR has a pro - active monitoring approach and its stated policy is to formally review all ratings “as often as is necessary” but at least once a year. In the event of a material development, be it company specific (such as acquisitions/divestitures, a major deviation from historical/forecast earnings trends, or an adverse development impacting on asset/earnings quality) or industry related (such as a liquidity crunch or other systemic shock), then GCR will immediately place the rating on “Rating Watch” and review the ramifications with management. GCR undertakes to subscribers that within a maximum of 180 days of having placed a rating on Rating Watch, it will either provide an update to the market or will have completed a full review and published the outcome of its review. Note that it is GCR’s policy not to change or withdraw a rating without first according the client the opportunity to respond.
F. Detailed Rating Methodologies
Click below to access key rating methodologies: