PACRA Regulatory Framework AR

PACRA Pakistan Credit Rating Agency Limited

Security Analysis & Portfolio Management

6/21/2014

Submitted to

Mr. Hafiz M. Waqar

Submitted By

Arooj Rehmat

Assignment

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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

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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.

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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

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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.

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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.

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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

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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.


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.


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

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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.


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.


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

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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.


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.


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

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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.


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.


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

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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.

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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

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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.

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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

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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.

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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

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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.

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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.

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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.

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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


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


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


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


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%).

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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


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



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



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

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Manager – Business Development

+92 42 3586 9504-6

[email protected]

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

[email protected]

Mr. Rana Muhammad Nadeem

Unit Head (Ratings)

+92 42 3586 9504-6

[email protected]

PACRA Regulatory Framework AR

Documents

Transcript of PACRA Regulatory Framework AR