We provide forward-looking insights as well as in-depth information. PACRA’s suite rating products “and other solutions” allow investors to identify risks, understand market trends, and make informed decisions for success in today's complex markets.
For over quarter-century, PACRA has been building and creating value for the financial markets in Pakistan and South Asia. Our rigorous analysis and deep expertise have resulted in over 8000 rating opinions across 10 distinct financial sectors and 45 corporate sectors. All these are testament to our expertise, exceptional command, market leadership, and the confidence reposed in our opinions. Our opinions have helped investors make informed decisions, manage risk and funds over “quarter- century” of growth.
PACRA has numerous rating products, and publishes opinions on a variety of scales. Credit ratings are the most common rating opinions among these. PACRA also publishes a variety of other relative opinions, ratings, grading and rankings that relate to financial or operational strength of entities, instruments, funds, security brokers, asset managers, real estate projects and many more. For each of these opinions, users should refer to the respective methodology, rating scale and definitions for more details on risk covered in each assessment.
PACRA’s credit ratings reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.
Corporate Entity Rating
PACRA’s entity rating is the opinion on the ability and/or willingness of an entity to meet its financial commitments. PACRA’s ratings for corporate entities are based on a mix of qualitative and quantitative factors, which are: Profile, Ownership, Governance, Management, Business Risk and Financial Risk. The relative impact of each on the overall credit risk assessment may vary case-to-case. While standalone credit quality is addressed, PACRA incorporates the relative positioning of an entity to arrive at the final rating. In certain cases, the final rating may be affected by the nature of the industry in which an entity operates. Inherently, risky industries may result in an absolute rating ceiling for all entities within that industry.
Debt Instrument Rating
PACRA issues ratings for both short-term and long-term debt instruments. The debt instrument rating takes into account the probability of default on a particular instrument. PACRA uses the credit rating of the issuing entity (referred to as “issuer”) as a baseline for determining the rating of the debt instrument of such entity. It then goes on to incorporate the unique characteristics of the instrument into its analysis. These include, but are not limited to, seniority of the debt instrument relative to other obligations of the issuer, underlying collateral and/or credit enhancements, if any exist. When rating short-term debt instruments, PACRA additionally considers the liquidity and financial flexibility of the issuer. Based on PACRA’s analysis of these factors, the instrument is either notched higher or lower than the issuer’s rating.
Key Types of Debt Instruments: Key types of debt instruments are: term finance certificates (TFCs), commercial papers and Sukuk. These can be differentiated on the basis of:
- maturity (money market vs. capital market debt instruments)
- Issuing entities (government, financial institutions, corporates, etc.)
- markets in which they are issued (conventional vs. Islamic)
- accessibility (listed vs. privately-placed)
- Security (secured, unsecured or subordinated). PACRA has evolved separate methodologies to cater to the distinct features of structured debt instruments, Sukuk, Basel III Compliant debt instruments and preference shares.
Structured Finance Rating
Structured finance instruments are a relatively complex form of debt, meant to mitigate risk using various assets. PACRA’s assessment begins with the profile and background of the originator – the entity that requires financing. The nature of the unique underlying assets along with their associated cash flows using a data heavy approach is taken into consideration, followed by analysis of the payment and recovery risk. Usually, a “preliminary rating” is assigned first. Subsequently, when the transaction is legally formalized, the legal documentation is reviewed to incorporate the credit and legal implications of the transaction structure to arrive at the “final rating”.
PACRA’s approach to rating of various types of Sukuk is different. The Sukuks are either asset-based (also known as “issuer backed” Sukuk and asset-backed Sukuk. There is a difference between the two types and PACRA Sukuk rating methodology has a separate criteria for each. The credit risk in an asset-based Sukuk terminates into the issuer of the Sukuk. Most often Asset based Sukuk are known as Issuer backed Sukuk. Here, in case of default, Sukuk holders have recourse to issuer not the asset. However, asset backed Sukuk is somewhat different. In case of its deficiency in cash flows, Sukuk holders retain complete recourse to underlying assets but not the issuer.
Basel III Compliant Debt Instrument Rating
PACRA’s Basel III Compliant debt instrument credit rating is an assessment of a specific debt issue of a bank and provides, “an opinion on the issuing bank’s ability to meet on a timely basis its principal and interest obligations pertaining to the debt instrument being rated”. The ratings consider both, interest and principal repayment, as “contractual obligations”. Tier 1 debt instruments are perpetual and hence repayment of principal is not a consideration. Repayment of interest is considered contractual obligation. These instruments are issued by banks to enhance their Capital Adequacy. To arrive at the rating, for Basel III Compliant debt instruments, PACRA first forms an opinion on the issuing bank, as per its Rating Methodology for Banks which is used as a baseline. PACRA then goes on to incorporate the unique characteristics of the instrument being rated into its analysis. The rating methodology for this specific rating highlight the salient criteria of Tier I and Tier II debt instruments that are considered crucial while forming a view on the rating.
Preference Shares Rating
Preference shares is a hybrid instrument with both debt and equity-like characteristics. While preference share rating is done in the same manner as any other instrument rating, a critical element is the assessment of the individual features of an issue to determine the degree of protection it offers to the investors versus issuers. Since ratings depict the risk to investor, the more protection the terms offer for the investor, the higher will be the rating. PACRA begins by determining the issuer’s debt repayment capacity, adjusted to reflect the financial impact of preference shares dividend obligations on the issuer’s financial profile. Given the subordinated nature of preference share dividends, this is usually followed by further notching down, the extent of which depends on the terms and conditions of the issue.
Microfinance Institution (MFIs) Rating
Microfinance institutions are organizations that provide loans to low-income clients, including micro-companies and the self-employed, who traditionally lack access to mainstream sources of finance from Banking Institutions. The risk assessment process for Microfinance Institutions comprises comprehensive analysis of the particular segment in which it operates, profile of the MFI, and its relative position in its respective segment. Analyzing the profile of the MFI includes comprehensive coverage of both quantitative and qualitative factors. In its assessment, PACRA’s quantitative analysis helps to reach an anchor rating. This rating can then be affected by qualitative factors – the modifiers. After standalone rating is finalized, the MFI’s rating is concluded while incorporating sponsor’s assessment of financial strength and expected / agreed level of support.
Non-Banking Finance Companies (NBFCs) Rating
NBFCs, include the companies offering leasing, investment finance services, housing finance, venture capital, discounting, investment advisory, and asset management companies. This rating mainly covers leasing companies, housing finance companies, and investment finance companies. The risk assessment process for Non-Banking Finance Companies (NBFCs) comprises of comprehensive analysis of the particular segment in which the NBFC operates, profile of the NBFC, and its relative position in the respective segment it operates in. Analyzing the profile of the NBFC includes comprehensive coverage of a wide range of factors that are categorized under these key areas: Profile, Ownership, Governance, Management, Business Risk and Financial Risk.
Independent Power Producer Rating
Independent Power Producer(IPP) is an entity that owns facilities to generate electricity. IPPs are special purpose companies and in Pakistan, they operate in a regulatory environment, insulating them from multiple business and financial risks. Moreover, IPPs enjoy tax-free status. IPPs maintain power purchase agreements (PPA), in local scenario, with Central Power Purchasing Agency (CPPA-G) and K-Electric (KE). This ratings covers all major IPPs, including, i) Thermal, including fuel, gas, and coal based, and ii) Renewable including hydel, bagasse, wind, and solar. The magnitude and relevance of risks vary for IPPs at different stages in their lifecycle. For example, for an IPP in its pre-COD stage the completion risk would be in focus. Meanwhile, other things remaining the same, for an operational IPP, performance risk would be in focus while completion risk would not be relevant.
Holding Company Rating
Holding companies are entities whose primary activity is holding controlling and non-controlling stakes in private or publicly traded companies, for the purpose of generating capital gains and/or dividend income. The need for a separate framework for rating of holding companies arises to account for the unique risks emanating from their investment portfolios and its impact on their credit quality. While some holding companies’ activities are restricted to holding stakes in investees, others have their own operations as well. The rating in both cases uses the Holding Company methodology, however, in case of the latter, the relevant sector methodology or PACRA’s Corporate Rating methodology provides the support.
The primary purpose of PACRA’s Asset Manager Rating is to provide users with an independent opinion on the quality and expertise deployed by an asset management company and potential vulnerability to investment management and operational challenges. It attempts to analyze an AMC not only on a standalone basis but also in the relative universe. Factors underlying the methodology are grouped under two segments – Anchors and Modifiers. Anchoring factors help to understand design and objectives of an AMC. PACRA evaluates i) Profile, ii) Ownership, iii) Governance, iv) Management, vi) Investment Risk Management vi) Portfolio Management and vii) Customer Relationship. Factors classified as modifiers capture an AMC’s progress and achievements using its design and against its objectives. This is determined by evaluating investment Performance in terms of Assets Under Management and Financial Sustainability.
Mutual Fund Ratings/Rankings
Mutual Funds are an important investment tool, PACRA provides various forms of ratings and rankings to the different types of funds, each with its own objective
Fund Stability Rating
Fund Stability Rating provides the investors with an objective measure as to the main areas of risk to which the income funds are exposed, that is credit risk, liquidity risk and interest rate risk. Stability Rating is assigned to a portfolio of assets i.e. mutual fund, rather than an individual security. This methodology applies to various types of fixed-income funds, money market funds, government securities funds, aggressive income funds. Stability Rating could provide investors with a useful yardstick in comparing their individual risk-return matrix, while making investment decisions.
Fund Performance Ranking
The performance ranking is an opinion on the fund’s historical performance in comparison to other funds in similar category measured through a quantitative yardstick. It provides an initial screening criterion to investors. Performance Ranking is an independent opinion on the relative risk adjusted performance of the fund. The ranking is a purely quantitative measure, avoiding any biases. PACRA's opinion is not a recommendation to purchase, sell or hold a fund, as it does not comment on the Fund’s NAV (Net Asset Value) or suitability for a particular investor.
Capital Protection Rating
Capital Protection Rating (CPR) indicates the degree of certainty regarding timely payment of the original investment as per terms of the scheme. The protection may be from day one or at maturity depending upon the risk appetite of the fund. The rating captures the relative degree of certainty of capital protection; it does not comment on the relative performance of these schemes in terms of returns offered to investors. Therefore, it is not advisable to create any analogy between capital protection rating and expected performance. A fund with a higher CPR may demonstrate average performance and vice versa. The Capital Protection Rating ranges from CP 1 (the highest rating which means that certainty of capital protection is very strong) to CP 5 (the lowest rating which implies that capital protection is weak).
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 captures the relative ability of the insurer to meet policy holders' obligations. The opinion is not specific to any particular insurance policy or contract. This opinion formed by evaluating the insurer’s ownership, governance, management, business risk and financial risks. Overall, PACRA has a more favorable opinion on insurance companies which have a strong ERM, relative position, persistency, underwriting performance, investment, liquidity and reinsurance arrangements.
Broker Management Rating
PACRA’s Broker Management Rating aims to facilitate users of the rating to differentiate between brokers on the basis of quality of management and services provided. Brokerage industry is characterized as very dynamic and volatile due to its direct dependency on the performance of capital markets. The analysis is based on multiple factors including Ownership, Governance, Management etc. The relative importance of each of the factors can vary depending on its potential to change the overall profile.
Broker Entity Rating
The basic precepts of this rating is understanding of the business model of the broker (and the inherent risks), the strategy of its management, local macro-economic environment, and developments happening in the industry. The relevant positioning of the broker, established in comparison with relative peers in the industry, is a key consideration to reach a final rating for a broker. PACRA bases its analysis of brokers on a number of quantitative and qualitative factors. The question of achieving objectivity is answered by the quantitative factors while the qualitative factors help in establishing the sustainability of the relevant factors in the foreseeable future. Neither all factors can be quantified nor do quantitative values portray the whole story. PACRA, therefore, seeks to employ a best combination of both and would stick to it, in order to ensure comparability on historical as well as synchronic basis.
Broker Fiduciary Rating
Broker Fiduciary Rating represents PACRA’s opinion on the relative management quality, customer service and sustainability of operations of a broker. PACRA arrives at an opinion after detailed evaluation of several qualitative and quantitative factors which include i) Profile, ii) Ownership, iii) Governance, iv) Management and Client Services, v) Internal Controls and Regulatory Compliance, vi) Business Sustainability and vii) Financial Sustainability. The Broker Fiduciary Rating ranges from BR1 (the highest rating which means exceptional quality of management, customer services and financial sustainability) to BR5 (the lowest rating which implies weak quality of management, customer services and financial sustainability)
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 a linear relationship, this could bring an independent rating for the project depending upon its unique characteristics.