Pamantasan ng Lungsod ng Maynila

PLM Business School

A.Y. 2020-2021 First Semester

FIN 3104: CREDIT MANAGEMENT AND COLLECTION POLICIES

Module 3: Chapter 7
Credit Evaluation

TOPICS OUTLINE
Credit Evaluation
a. Credit Information: Sources and Code of Ethics
b. Traditional and Other Bases of Credit
c. Credit Rating System: Credit Rating Agencies (Domestic and International) ; Credit
Management Association of the Philippines (CMAP)
d. Internal and External Audit

LEARNING OBJECTIVES
• Identify the multifarious sources from which a credit investigator could find and secure credit
information.
• Study the CMAP adopted Code of Ethics that guide credit man in the gathering and use of credit
information.
• Know the different credit factors to be evaluated as reported in the Credit Investigation Report.
• Understand the relevance and process of conducting a proper and thorough analysis and
evaluation of credit risks of applicants for credit.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
Introduction

Imagine how things would have been in case lenders would be approving every application they
receive. It would be impossible for business to be sustained. In business, specifically, in credit, the
chance that the borrower will fail to pay the obligation is always there. For this reason, lenders test the
eligibility of the borrowers before they approve loans. It is vital to assess borrowers and their ability not
only to repay the loan but also to do that within the required time.

Credit Evaluation
• Credit evaluation refers to the process borrowers are subjected to for them to be eligible for
funding, or to pay for products within a specified period.
• Evaluating a borrower’s loan application to determine the financial health of an entity and its
ability to generate sufficient cash flows to service the debt. In simple terms, a lender conducts
credit analysis on potential borrowers to determine their creditworthiness and the level of credit
risk associated with extending credit to them.
• It involves collecting information from the borrower, analyzing the information provided, and
making a decision on whether or not to approve the loan.

Why do we need to perform credit evaluation to clients?

✓ To establish the veracity of information disclosed by the client in the application form
✓ To gather credit information that will aid as a tool to establish the credit worthiness of
prospective and existing clients
✓ To keep management constantly informed of developments relative to existing customers.

But what is involved in the assessment process? In this discussion, we are going to examine the
concept credit evaluation process and the significance of the C’s of credit. Basically, Credit evaluation
process is composed of 3 steps: Gathering of information, analyzing the information gathered and
making decision.

First Step: Gathering of Information

• The process begins with the collection of data and information relevant to the client.
• In this step, lenders collect necessary credit information that will help them in determining the
creditworthiness of the borrower.

Credit Information
• Information about a person's or company's ability to pay debt, examined especially by banks
before they decide to lend money.
• Credit information includes public information, your credit card, car loans, and mortgages.
However, it does not emphasize information such as race, gender, religion, sexual orientation.
• If we see a sample of a credit report, information are divided into different sections:
o Personal Information – which includes name, past and present addresses, social security
number and of course, your employment history and sources of income.
o Public Information – This includes items such as tax liens or court judgments against
the subject.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 ▪ Tax liens – tax lien is the government’s legal claim against your property when
you neglect or fail to pay a tax debt. The lien protects the government’s interest in
all your property, including real estate, personal property and financial assets.
✓ It happens when an individual has unpaid, legally enforceable tax debt.
▪ Court judgment – is a court order that is the decision in a lawsuit. If a judgment
is entered against you, a debt collector will have stronger tools, like garnishment,
to collect the debt.
o Account History – An account history may be referred to when a record of transactions
by an individual or organization.
▪ Whether you pay timely payments on your credit cards, mortgage, auto loans, etc.
▪ It can also include your purchasing habit, how often you use credit in supermarket
to pay for groceries, your shopping behavior, irregular transactions in your
account, etc.
o Inquiries by creditors – this includes all inquiries in your credit history that occur when
you apply for new credit.
• As discussed in the chapter 5, there are lots of credit information that are being collected
specifically for an individual and business borrower.

Where do lenders find this information?

SOURCES OF CREDIT INFORMATION

There are multifarious sources from which a credit investigator could find and secure this credit
information. Some of these sources are the following:

1. Salesman's Reports
The company's first contact with a new customer is the salesman. If all goes well, the salesman
will have the most frequent contacts with an established customer. It is, therefore, necessary that
salesmen should be trained to submit credit applications on all prospective and/or new customers, and
when necessary to obtain current financial statements. Most firms and individuals are conditioned to the
necessity of furnishing credit information to support credit transaction.

Without asking questions, the salesman can obtain a great deal of information by keeping his
eyes and ears open. He can judge the location and appearance of the place of business and presence or
absence of competition. He can note down the names of other products carried and even observe the
personalities of employees and of management.

To obtain the full benefit of the salesman's observation, a spirit of mutual confidence and
cooperation must be developed between the sales and credit departments. Through the frequent calls of
the salesman may receive early news of changes in sales trends, collections, movements of inventory
and other matters.
Since the salesman knows his account personally, his information can be of great value to the
credit manager. Due to the regularity of his visits, the salesman can be trained to develop facts and
impressions on a continuing basis to make a report on this.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
2. Customer Supplied Information
In the final analysis, the principals of the company being investigated have many answers not
obtainable in any other quarter. Indeed, there is no better source of information about the operation and
financial condition of a business than the business itself. Therefore, it is reasonable to expect that direct
contact with a customer can provide the credit man with available financial details, banks and trade
references, and other information of importance of the credit exposure, and the degree of the cooperation
which can be obtained from the customer.

Direct contact between the credit department and the customer offers many advantages.
Regardless of the method used, such contacts can be invaluable in establishing a close and friendly
working relationship and inspiring mutual respect and confidence. They can be used to clarify terms of
sale, thereby obviating possible dissatisfaction on the part of the buyer. Particularly, at the early state of
the relationship, direct contact can assist in developing a sound basis for continued credit granting.

In all customer contacts, whether by letter, by telephone or in person, the credit manager should
remember that he is the representative of his company and that sound credit administration is
undoubtedly one of its finest tools. A credit department which builds goodwill with its company's
customers will also gain the fullest cooperation and respect from the sales department.

Contact with the customer may take the form of a personal visit, a phone call, or by direct
correspondence.

3. Bank Information
Banks are usually quite knowledgeable about marginal companies. The larger banks in the
metropolitan areas have files which contain a wealth of information.

Having obtained the name of the customer's bank by means of direct inquiry or by noting the
bank on which his checks are drawn, the credit manager or representative is in a position to secure from
the bank further helpful information.

A letter of inquiry to the customer's bank usually will bring a reply indicating the customer's
bank balance expressed in such terms as "medium four figure balance or "low figure balance” together
with information concerning the customer's line of credit, if any, and the manner in which payments on
bank loans are handled.

The best means of obtaining complete information from a bank, as from any other sources, is by
personal contact. The credit manager should make a special point of becoming well-acquainted with
members of the credit department in his bank.

4. Credit Interchange
Direct interchange of credit information is also one of the most valuable sources of information.
The credit analyst should not overlook the possibility of directly exchanging ledger and other pertinent
information with credit representatives of other concerns known to be supplying the customer under
review. He should keep in mind, however, that this is probably the most costly method of obtaining the
information desired. Hence, direct interchange should generally be limited to those cases in which there
is a substantial exposure for the inquiring company, or in which the interchange bureau is, for some

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
reason, inadequate, or when group interchange is not practicable because of the distant location of
suppliers.

When it is decided that direct interchange is desirable, the experienced credit man will not
confine his inquiries to trade references" given by the customer, but will also check with others who
would logically be providing an important portion of the firm's requirements.

5. Credit Reporting Agencies

The service of one or more agencies or bureaus may be availed of by the credit department of the
company. This, of course, depends upon the number of accounts the company has. The mercantile
agency report usually attempts to cover all the major factors involved in the credit decision, from history
through operations, including the background of the principal financial conditions, and payment records.
When properly analyzed, information which can be secured from this source may be sufficient to
eliminate the need for further investigation. In some instances, information from this source may serve
to point the areas which should be further explored, thus enabling the credit analyst to determine what
specific information must be secured from other sources.

One of the largest credit reporting agencies is the TransUnion East Asia. It has been operating in
the Philippines since 2011. It is partnered with BPI, Banco de Oro, Metrobank, HSBC, and Citibank.
The partnership created a centralized credit-information system that collects credit data. However, banks
who have not partnered with TransUnion don’t have access to the reports they provide. They had started
to gather personal information on credit card borrowers, their educational background, credit record,
employment history and other data that would allow banks and financial institutions to manage risks
associated with lending. TransUnion gets data from its partner institutions as well as public records.
Partner banks can request TransUnion’s information, and along with your other records, they use that
information to make decisions. TransUnion does not make credit decisions — that’s 100% up to the
banks themselves — they just give information.

6. Other Sources of Information

a. Interchange Bureaus - The ledger interchange bureau of the Credit Management Association of the
Philippines (CMAP) is a source of information regarding the manner in which a customer meets his
trade obligations. The association provides the most economical means of obtaining the ledger
experience of other suppliers and often eliminates the need for other more expensive methods of
investigating the customer's trade payment habits.

b. Court and Securities and Exchange Commission (SEC) listings - The CMAP sends out to its
members court and SEC listings. There, you will find customers with cases in court and corporations
newly organized those with increased capitalization and those which are dissolved. This is so also with
partnership.

c. Securities and Exchange Commission - Copies of the Articles of Incorporation and By-Laws could
be secured from this government agency. Articles of Partnership and financial statements of
corporations are also filed with this government office. By checking these sources carefully, the credit
representative can confirm information about which there may be doubt and can obtain other useful
information regarding his customers.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
d. Miscellaneous Sources - Daily newspapers are also important sources of information. Even the
obituary columns should not be bypassed since immediate knowledge of the demise of the guiding
principle of a business can be of great value to a creditor. Announcement or recent promotions, branch
openings and the like are matters of important interest to us. Accountants and attorneys are also
important sources of information.

With computerization, all the data and credit information gathered could be compiled and stored in a
credit data bank for future reference.

Second Step: Analyzing the Information Gathered

- After gathering the information relative to the borrower, the lender or bank analyzes obtained
data to determine the applicant’s creditworthiness.

TRADITIONAL AND OTHER BASES OF CREDIT

Traditional: C’s of Credit of Credit Analysis

Credit analysis by a lender is used to determine the risk associated with making a loan.
Regardless of the type of financing needed, a bank or lending institution will be interested in both
your business and personal financials. Credit analysis is governed by the “5 Cs:” character, capacity,
condition, capital and collateral.

• Character: What Your Credit History & Background Are.

✓ Lenders need to know the borrower and guarantors are honest and have integrity.
Additionally, the lender needs to be confident the applicant has the background,
education, industry knowledge and experience required to successfully operate the
business. Lending institutions may require a certain amount of management and/or
ownership experience. They will also ask about your licensing and whether or not you
have a criminal record.
As history is the best predictor of the future, a lender will examine the personal credit
of all borrowers and guarantors involved in the loan. Sound business and personal
credits are a must. Check both reports before calling your lender; if there are any
delinquencies, be prepared to explain. The lender may be able to make exceptions for
low credit scores.
• Capacity (Cash flow): What Your Ability to Repay Your Debt Obligations Is
✓ The lender wants to know that your business is able to repay the loan. The business
should have sufficient cash flow to support its business expenses and debts
comfortably while also providing principals’ salaries sufficient to support personal
expenses and debts. Examining the payment history of current loans and expenses is
an indicator of the borrower’s reliability to make loan payments.
• Condition: What the Market, Economic, Industry & Other Factors Are
✓ The lender will need to understand the condition of the business, the industry, and the
economy, which is why it is important to work with a lender who understands the
WCB industry. The lender will want to know if the current conditions of the business
will continue, improve or deteriorate. Furthermore, the lender will want to know how
the loan proceeds will be used- working capital, renovations, additional equipment,
etc.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 • Capital: What Your Level of Leverage Is
✓ Your lender will ask what personal investment you plan to make in the business. Not
only does injecting capital decrease the chance of default, but contributing personal
assets also indicates that you are willing to take a personal risk for the sake of your
business; it shows that you have ‘skin in the game.’
• Collateral: What Assets Are Available to the Lender
✓ A lender will consider the value of the business’ assets and the personal assets of the
guarantors as a secondary source of repayment. Collateral is an important
consideration, but its significance varies depending on the type of loan. A lender will
be able to explain the types of collateral needed for your loan.

The five components that make up a credit analysis help the lender understand the owner and the
business and determine credit worthiness. By knowing each of the “5 Cs,” you will have a better
understanding of what is needed and how to prepare for the loan application process.

Other bases of Credit: Factors to Consider

The Following are some of the factors that lenders need consider when evaluating an individual or
business that is seeking credit:
• Credit worthiness. A history of trustworthiness, a moral character, and expectations of
continued performance demonstrate a debtor's ability to pay. Creditors give more favorable terms
to those with high credit ratings via lower point structures and interest costs.
• Size of debt burden. Creditors seek borrowers whose earning power exceeds the demands of the
payment schedule. The size of the debt is necessarily limited by the available resources.
Creditors prefer to maintain a safe ratio of debt to capital.
• Loan size. Creditors prefer large loans because the administrative costs decrease proportionately
to the size of the loan. However, legal and practical limitations recognize the need to spread the
risk either by making a larger number of loans or by having other lenders participate.
Participating lenders must have adequate resources to entertain large loan applications. In
addition, the borrower must have the capacity to ingest a large sum of money.
• Frequency of borrowing. Customers who are frequent borrowers establish a reputation which
directly impacts on their ability to secure debt at advantageous terms.
• Length of commitment. Lenders accept additional risk as the time horizon increases. To cover
some of the risk, lenders charge higher interest rates for longer term loans.
• Social and community considerations. Lenders may accept an unusual level of risk because of
the social good resulting from the use of the loan. Examples might include banks participating in
low-income housing projects or business incubator programs.

Third Step: Making Decision

- In this step, the lender will now decide whether to approve the loan or not. But it will be
discussed further by the succeeding reporter.

What is Credit score?

• Credit score is the number used to determine someone’s capability to manage debt. Credit
companies measure several factors including your credit payment history, the amount loaned or
credit utilization ratio, length of credit history, types of credit used, and new credit.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 • In countries outside the Philippines, credit scores normally range from 350-800. The higher the
score, the better chances you have to acquire a loan. Unlike other countries like the United States
and Canada, the Philippines currently does not have a unified system of credit reporting.
• While there is no standard system of credit reporting, the Credit Information Corporation is in
charge of credit scoring in the country. Concurrently, banks resort to a myriad of available
private credit report providers in order to determine if an individual is eligible for a loan or not.

What are the factors considered in credit scoring?

Length of credit history - This includes the length of time you had credit. If you own credit cards, they
will average the age of your oldest card, your newest, and all other credit cards you hold.
Payment history - This is made up of your level of responsibility when it comes to paying your
credit/loans on time. A missed payment can cost someone’s credit score to drop by 90 -100 points.
Money owed - This includes the money you currently owe across several lending institutions including
the money you owe from credit cards. The bigger the amount you owe, the less likely you get approved
for new credit.
Credit application - Whenever you apply for a credit or loan, you get flagged for opening a new credit
line. Thus, having multiple credit lines can affect your rating.
Credit mix - These gauges the different types of credit accounts you own such as credit cards, cash
loans, car loans, and mortgage.

How can I maintain a good credit score?

Here are a few tips to follow in order to achieve and maintain a good credit score.
• Avoid delayed and missed payments. Sign up for automatic payments so that monthly dues can
be settled just in time for your deadline.
• Stop going over your credit limit so that lenders won’t flag you for overspending.
• Do not close credit cards that have a remaining balance.
• Settle your existing loans/credit first before applying for a new one.
• If you can, build good credit early.

Remember, getting a loan is a big responsibility, so do your best to stay on top of your loan and pay
them diligently. A bad credit score may damage you financially and would stop you from acquiring new
credit when you most need it.

CODE OF ETHICS IN EXCHANGE OF CREDIT INFORMATION

Credit information recklessly handled could unnecessarily damage an individual’s or even the
company’s reputation. Because of this, in the Philippines as in any other countries, the CMAP has
adopted a Code of Ethics to guide credit men in the gathering and use of credit information. Non-
member individuals and companies would do well to follow the same code of ethics.

In the June 1999 issue of The Journal of Lending & Credit Risk Management, RMA Chairman
Lee Murphey advised readers to look for RMA's Practices for the Exchange of Commercial Credit
Information in the September 1999 issue. Practices is an updated version of The Code of Ethics for the
Exchange of Commercial Credit Information between Banks, a document that has guided bankers since

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
RMA's formation 85 years ago. The updated document more accurately reflects the financial services
industry and RMA's membership today. However, as Murphey pointed out, "The basic principles that
have guided our industry for almost nine decades will not change. Confidentiality and accuracy will
remain the hallmarks of RMA's Practices for the Exchange of Commercial Credit Information..."

Preamble

RMA has, since its inception, recognized the importance of a free and responsible exchange of
information in credit-based economic systems. Practices for the Exchange of Commercial Credit
Information facilitates such exchanges and promotes sound decision-making while reducing the risk of
loss due to fraud.

Commercial credit information is distinct from consumer credit information, whose exchange is
expressly regulated. Both types of information exchange are subject to various laws that may differ by
jurisdiction. RMA also advocates submission of information to credit-reporting agencies. (Specific
guidelines for submitting that data are covered elsewhere.)
These Practices are designed for commercial transactions, and their use is subject to applicable federal
and state laws and/or laws in other jurisdictions. In particular circumstances, these laws could relate to
defamation and the right to privacy; antitrust laws; credit-reporting regulations; and limitations on the
use of confidential records as well as customer-related information and computerized data. Such laws
also include U.S. securities laws regulating disclosure of material inside (nonpublic) information. Since,
under the securities laws, material inside information may, in some cases, not be disclosed (and in other
cases may not be withheld), for transactions in connection with the sale or purchase of a security, and
such transactions may involve bank financing, care should be exercised and the advice of counsel sought
when any such material inside information may be in the possession of the respondent.
A respondent may not be able or willing to answer an inquiry for many reasons. One reason may be the
possible possession of nondisclosable inside information. Therefore, the respondent's silence should not
automatically be interpreted as a negative response.

Articles
1. Two important elements in the exchange of credit information are confidentiality and accuracy of
inquiries and replies. Confidential information includes the identity of inquirers and sources that cannot
be disclosed without their permission.
2. Each inquiry should specifically indicate its purpose and the amount involved.
3. Responses should be prompt and disclose sufficient material facts commensurate with the purpose
and amount of the inquiry. Specific questions should be given careful and frank replies.
4. It is inappropriate to approach a competitor about a prospect without frankly disclosing plans to solicit
the account.
5. A request for information related to existing or intended litigation should be clearly identified as such.
6. All credit correspondence, including form letters, should bear the manual signature of a responsible
party. When the use of e-mail or other electronic correspondence precludes a manual signature, the
identity of the author should be fully disclosed.
7. The sharing of credit information on a mutual customer should not be more frequent than annually,
unless a significant change in the relationship necessitates an earlier revision.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
8. When a subject's bank(s) of account is (are) unknown and cannot readily be determined, all other
banks, particularly RMA member banks, are encouraged to assist one another in locating the bank(s) of
account.

CREDIT RATING SYSTEM

Credit Agencies, Credit Management Association of the Philippines (CMAP)

What is a credit rating?

• A credit rating is an opinion that provides a measure of credit quality. It is an unbiased,
independent, third-party evaluation of an issue or issuer. It is a grading system which focuses on
a company’s capability and willingness to pay its obligations upon maturity.
• However, a credit rating is not a guarantee against future losses, nor is it a recommendation to
buy or sell a specific security. It is a tool that can be used by investors, regulators, and the
general public to augment their own assessment of a particular investment.
• Basically, a rating agency is a company that assesses the financial strength of companies and
government entities, especially their ability to meet principal and interest payments on their
debts.
• A credit rating provides an objective, independent evaluation of the creditworthiness of a
borrower or its ability to meet its financial obligations upon maturity, as expressed through rating
symbols. Its purpose is to evaluate the predictability of cash generation of a borrower based on
prevailing conditions and information made available to a credit rating service at the time of
rating.

What are the types of credit rating available?

• There are issue credit ratings and issuer credit ratings.
✓ An issue credit rating assesses a company’s capability to pay a specific debt instrument
according to the terms (e.g. amount, maturity) of the issue.
✓ An issuer credit rating, also sometimes called corporate credit ratings or company ratings
or counterparty credit ratings, is a measure of a company’s over-all creditworthiness.

What are credit ratings used for?

• A credit rating is typically used to obtain funding from the public. Raising funds from the capital
markets provides a company with improved financial flexibility and can allow it to negotiate for
better terms and interest rates. A credit rating can also be used for marketing and benchmarking
purposes as through the rating process, a company’s strengths, weaknesses, opportunities and
threats will be highlighted.
• On the part of regulators and investors, credit ratings can assist in their own evaluation and
monitoring of specific companies and instruments. Credit rating agencies typically have access
to confidential information which will not be readily available to other market participants

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
CREDIT RATING PROCESS AND CRITERIA
To have a fully understanding of Credit Rating Process, we will answer questions relative to credit
rating:
• How long does the credit rating process take?
o The credit rating process can take anywhere from four to eight weeks from submission of
complete information for credit rating. The actual timeframe depends on the type and
complexity of the issue and/or issuer.
• What does the credit rating process consider?
o To arrive at the final credit rating, a credit rating agency will consider various qualitative
and quantitative factors. These can be generally classified into Business Risk and
Financial Risk.
o Business Risk will cover items like: Industry Characteristics and Prospects, Market and
Competitive Position, Operating Efficiency, and Management Quality and Shareholder
Strength. Financial Risk will consider the aspects of Profitability, Cashflow and
Liquidity, Capital Adequacy and Financial Flexibility. The general framework for credit
analysis applies across industries and sectors although specific rating criteria would be
considered on a per sector (e.g. corporates, banks and financial institutions) basis.
• How often is a credit rating reviewed?
o The lead analyst for a particular account reviews the specific issue or issuer on a
continuous, daily basis. The analyst is expected to keep himself/herself informed
regarding developments relating to his or her account. On a formal basis, updated
information is requested quarterly while it is mandatory to meet with a company’s
management, for as long as there is an outstanding credit rating, at least once a year.
• How often and when can a rating be changed?
o A credit rating can be changed at any time depending on prevailing circumstance and/ or
prospects. Any potential upgrade or downgrade, however, will necessitate meeting or
discussing with the company concerned to ensure the accuracy of facts and rating
considerations in arriving at the revised credit rating.
• How important are management meetings? Who are expected to participate?
o Management meetings are an important component of the credit rating process. These
provide opportunities for the Rating Committee to obtain information on an account and
to assess the quality of management. On the part of the company being rated, the Chief
Executive Officer and Chief Finance Officer typically participate in the management
meetings for credit rating. Other key officers overseeing the different functional areas
(e.g. marketing, operations) may also participate as the company sees fit.
• If the company being rated does not agree with the credit rating assigned, what remedies exist?
✓ Credit rating agencies have an appeal process whereby the company being rated may
appeal the credit rating provided that there is new information to be considered.

CREDIT RATING FEES

• Who pays for the credit rating fee?
✓ The company applying for a credit rating pays for the fee. The fee is paid up-front,
similar to the practice of rating agencies worldwide.
• Since the company applying for a credit rating pays for the fee, will this result in conflict of
interest?

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
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 ✓ Credit rating agencies (both domestic and international) have similar practices of
generating rating fees from the companies that they rate. Payment of the fee, however,
should not influence or impact the final credit rating that is eventually assigned to the
company.

A credit rating agency must be perceived as objective, independent and transparent, regardless of which
entity pays for the credit rating fee

CREDIT RATING AGENCIES IN THE PHILIPPINES

1. Philippine Rating Services Corporation

Philippine Rating Services Corporation (PRSC), known as PhilRatings is a rating agency in the
Philippines. PhilRatings was founded as CIBI Ratings, part of the Credit Information Bureau, Inc.,
known as the CIBI Foundation, which was set up in 1982 by the Philippine Securities and Exchange
Commission, Central Bank of the Philippines (now Bangko Sentral), and the Financial Executives
Institute of the Philippines. In 1998, PhilRatings became a separate company but remained a wholly
owned subsidiary of the CIBI Foundation.

The Securities and Exchange Commission (SEC) has approved the application of PhilRatings for
accreditation as a credit rating agency (CRA). The approval followed Philratings’ compliance with the
accreditation requirements of Rule 12.1 of the Securities Regulation Code. Philratings has an authorized
capital of P10 million.

Philratings is Standard & Poor’s affiliate in the Philippines and a member of the Association of
Credit Rating Agencies in Asia, an organization of 19 CRAs in the region. Philratings has been doing
credit rating for the last 18 years. It participates actively in the development of the Philippine capital
market by implementing a national credit rating system.

The Bangko Sentral ng Pilipinas (BSP) earlier approved the recognition of Philratings as a
domestic CRA for bank supervisory purposes, the first domestic CRA to be accredited by the BSP.
Eligibility criteria for recognition include a minimum five-year track record in issuing reliable and
credible ratings; a pool of experienced analysts; competent and experienced board of directors; an
established rating methodology; and an established record of independence, objectivity, and
transparency.

In addition to the recognition by BSP, Philratings’ ratings have been used by the SEC as basis in
approving various companies’ applications for licenses to issue debt securities to the public. In
performing its credit rating function, Philratings relies on the database of information that it has built
since 1985. This includes all companies with commercial paper or bond issues that have been rated, as
well as prospective issuers. Aside from rating commercial paper issuers, Philratings also offers ratings
for banks and financial institutions, local government units, project finance transactions, and asset-
backed securities. Other services include: credit training, financial or credit indicators based on publicly-
available information, business valuation, and due diligence studies.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
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What do PhilRatings’ credit ratings express?

• PhilRatings’ credit ratings express probability of default. As one goes down the PhilRatings’
credit rating scale from highest to lowest rating, the probability of default increases and
capability to pay maturing obligations decreases. A default occurs when there is non-payment on
interest, any amortization, or principal when due.

The highest ratings assigned by PhilRatings for short term and long term issues are PRS 1 and
PRS Aaa, respectively, while the lowest are PRS 6 and PRS C.

PhilRating Codes for Long-Term Debt

• PRS Aaa : Obligations rated ‘PRS Aaa’ are of the highest quality with minimal credit risk. The
obligor’s capacity to meet its financial commitment on the obligation is extremely strong. PRS
Aaa is the highest rating assigned by PhilRatings.
• PRS Aa : Obligations rated ‘PRS Aa’ are of high quality and are subject to very low credit risk.
The obligor’s capacity to meet its financial commitment on the obligation is very strong.
• PRS A : With favorable investment attributes and are considered as upper-medium grade
obligations. Although obligations rated ‘PRS A’ are somewhat more susceptible to the adverse
effects of changes in economic conditions, the obligor’s capacity to meet its financial
commitments on the obligation is still strong.
• PRS Baa : An obligation rated ‘PRS Baa’ exhibits adequate protection parameters. Adverse
economic conditions and changing circumstances, however, are more likely to lead to a
weakened capacity on the part of the obligor to meet its financial commitment on the obligation.
PRS Baa-rated issues may possess certain speculative characteristics.
• PRS Ba : An obligation rated ‘PRS Ba’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties relating to business, financial or economic
conditions, which could lead to the obligor’s inadequate capacity to meet its financial
commitment on the obligation.
• PRS B : An obligation rated ‘PRS B’ is more vulnerable to nonpayment than obligations rated
‘PRS Ba’, but the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse economic conditions will likely impair the obligor’s capacity to meet its
financial commitment on the obligation. The issue is characterized by high credit risk.
• PRS Caa : An obligation rated ‘PRS Caa’ is presently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the obligor to meet its
financial commitments on the obligation. In the event of adverse economic conditions, the
obligor is not likely to have the capacity to meet its financial commitment on the obligation. The
issue is considered to be of poor standing and is subject to very high credit risk.
• PRS Ca : An obligation rated ‘PRS Ca’ is presently highly vulnerable to nonpayment. Likely
already in and very near default with some prospect for partial recovery of principal or interest.
• PRS C : An obligation is already in default with very little prospect for any recovery of principal
or interest. PRS C is the lowest rating assigned by PhilRatings.

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Why should a company get a credit rating from PhilRatings?

• PhilRatings has a 33-year track record in domestic credit rating. It is knowledgeable about local
market conditions, has established ties with market participants and information sources, and
conducts its credit rating in a professional, courteous and thorough manner. It has likewise
demonstrated its ability to safeguard the confidentiality of information provided for credit rating
and to adequately manage conflict-of-interest situations. All confidential information received
from a client is not shared with any other party and is just used for internal credit rating
purposes. Any Rating Committee member who may also have a “perceived” or “actual” conflict-
of-interest, whether for or against, a particular account, does not participate in the credit rating
process or credit rating deliberations for the said account.

How much does PhilRatings charge for a credit rating?

• PhilRatings’ fees depend on the amount of time and effort needed to complete a credit rating. For
issue credit ratings, the fee is tied to the amount to be issued. For issuer credit ratings, it is tied to
the asset size. PhilRatings’ fee structure is reviewed on a regular basis and may be adjusted at
any time.

How does a company go about getting a credit rating from PhilRatings?

• The company or its underwriter can get in touch with PhilRatings at (02)812-3210 or at 812-
3215. They may also send inquiries to [email protected]. Upon receipt of the
inquiry and after initial queries and discussions, PhilRatings will provide the prospective client
with a credit rating proposal and a list of initial information requirements for credit rating.
PhilRatings will also meet with the prospect to explain the credit rating process. Once a decision
has been reached in terms of obtaining a credit rating, a Rating Agreement will need to be signed
by PhilRatings and the client to formalize the rating engagement.

How does PhilRatings publicize its credit ratings?

• PhilRatings publicizes its credit ratings via reports submitted to the SEC, as well as the
preparation of press releases and rating write -ups. These are provided to the general public free
of charge. Information is likewise available at the company’s official website:
www.philratings.com and via its social media platforms on Facebook and on Twitter.

Does the company do unsolicited ratings?

• PhilRatings does not do unsolicited ratings. As a credit rating agency, PhilRatings believes that it
is essential to get the full cooperation of the company and to be able to obtain complete
information so that a fair and appropriate rating for the issue or issuer can be assigned.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
Does the company do private credit ratings?

• PhilRatings can do private credit ratings. Prior to acceptance by any company of their final credit
rating, all credit ratings are kept private. Even the fact that the company is undergoing the credit
rating process is likewise kept confidential. At the end of the credit rating process, the final credit
rating can still be kept confidential provided that the company being rated does not issue debt
securities to the public.

Once issued, can credit ratings be withdrawn?

• Ratings can be withdrawn due to the following reasons:

1. Rated debt security has been paid in full upon maturity.
2. Company has decided not to renew its credit rating agreement after the yearly agreement
lapses.
3.Company being rated does not provide enough information which PhilRatings can use as basis
for regularly updating and monitoring the credit rating.

As much as possible, PhilRatings refrains from withdrawing credit ratings due to lack of information for
surveillance purposes.

How many credit ratings has PhilRatings issued to date?

• As of the end of January 2019 and since 1985, PhilRatings has published 532 issue and issuer
credit ratings for 135 companies, with total amount of rated debt at P1.37 trillion.

What types of issues and issuers has PhilRatings evaluated to date?

• PhilRatings has evaluated corporates in various sectors, banks and financial institutions,
government institutions, insurance companies, as well as structured finance transactions. It has
also rated local government units and insurance companies on a private, confidential basis for
exclusive use by specific parties and entities.

How many defaults have there been to date?

• To date, PhilRatings has recorded five defaults out of 532 issues and issuers (representing less
than1% or 0.94% of total number), with all defaults occurring after the Asian financial crisis in
1997. Of the total estimated issue amount, accounts which went into default corresponded to debt
issues amounting to P6.7 billion or less than 1% or 0.49% of total issue amount since 1985.
Since 2003, however, PhilRatings has not recorded any case of default. The company’s annual
default rate remained at 0% for the last 16 years.

Members of the Rating Committee

Individual members of PhilRatings’ Rating Committee have been trained by international rating
agencies on various credit rating topics and rating criteria.

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The Credit Rating Process (PhilRatings)

a. The rating process begins when a prospective ratee, or its underwriter, requests a company rating
and/or rating on its proposed debt issue.
b. A team of analysts is assigned to the particular rating task and comes up with a list of information
requirements for the ratee. The team reviews financial and non-financial information received from the
ratee and from other sources. All privileged information is kept strictly confidential by the
analysts/Rating Committee.
c. The team of analysts meets with the ratee's senior management to discuss business and competitive
strategies, operating practices, financial position and other factors that could affect credit quality.
d. After meeting with the ratee's management, members of the analytical team present their findings to
the Rating Committee. All relevant factors concerning the rating are explored in an open and candid
discussion that results in a rating decision.
e. Once the Rating Committee assigns a rating, the decision is communicated to the ratee, together with
the reasons for the rating.
f. In the event that the ratee disagrees with the rating, it has the opportunity to appeal the decision or the
right to keep the rating confidential. The ratee appealing a rating decision must provide new information
which is material to the appeal and which specifically addresses the concerns expressed by the Rating
Committee. There is no guarantee, however, that additional information will alter the Rating
Committee’s initial rating decision.
g. Once the ratee accepts the rating, it is disseminated to the market and to PhilRatings’ subscriber base,
as well as to local and foreign business news media.
h. To ensure up-to-date assessments while the credit rating remains outstanding, PhilRatings monitors
the on-going performance of the rated issue or issuer and the economic environment in which it
operates. PhilRatings expects the ratee to provide financial and other information on a timely basis. The
rating can change at any time if warranted.

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i. But even where there is no obvious reason to change the rating, PhilRatings conducts a formal annual
review, which involves a meeting with the ratee. These review meetings focus on developments over the
period since the last meeting, and on the outlook for the coming year.

2. Credit Rating and Investors Services Philippines, Inc. (CRISP)

Credit Rating and Investors Services Philippines, Inc. (CRISP) is an independent credit rating
agency that provides an alternative in assessing investment risks in the Philippine debt market. CRISP
employs a rigorous approach in evaluating potential risk factors that may affect the ability of issuers of
instruments of financial investments to realize their goals. CRISP analysts are industry practitioners and
academics with many years of direct experience in the business and consulting fields, both in the
Philippine and international settings.

CRISP Corporate Rating Criteria

CRISP’s corporate credit rating methodology examines industry risk, business risk, financial risk
and management quality to arrive at an overall credit opinion on an issuer’s credit worthiness. CRISP
does not assign fixed weights to these analytical areas to come up with a rating. Rather, CRISP uses
them as inputs in developing an assessment of the risks associated with the proposed investment
instrument. CRISP uses these analytical areas as guide in ensuring a comprehensive evaluation of the
factors that could affect the issuer’s creditworthiness.
a. Industry Risk. A CRISP risk assessment for a corporate issuer is done in the context of the
industry where it operates to appreciate its organizational strategy and financial performance.
Among issues that CRISP includes in this analysis are industry growth potential issues, relevant
public policies, and level and nature of competition.
b. Business Risk. In evaluating business risks, CRISP considers an issuer’s current market
position, business strategy, and operating model. CRISP reviews the strategy and plans by the
prospective issuer to maintain or expand, as the case may be, its future market share. CRISP
examines the operations of the issuer to identify its strengths or operating weakness that could
enhance or undermine its market position and financial performance. CRISP takes into
consideration an issuer’s product diversity, sourcing strategies, and their overall fit with its
organizational set up and performance.
c. Financial Risk. CRISP reviews an issuer’s historical financial performance for basis of its
financial projections and to assess its financial flexibility. Among issues of major interest to
CRISP’s analysis are the issuer’s profitability, capital structure, cash flow adequacy and overall
financial stability. CRISP requires that an issuer submit a 5-year audited financial statements,
interim reports and financial forecasts. CRISP examines an issuer’s funding structure to identify
potential risks associated with interest rate and/or currency exchange fluctuations and debt
maturity schedules.
d. Management Quality. CRISP considers management quality a major driver of an issuer’s
performance. CRISP assesses an issuer’s management strategy, policies and organizational
processes. Major issues that are considered in this analysis include management track record,
composition, policies and succession.

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CRISP’s Rating Approach

The Credit Rating and Investors Services (CRISP) approach to credit rating combines the
rigors of academic research in assessing company and industry risks while employing the Philippine
industry expertise of its key analysts to come up with an independent opinion on debt issuers
creditworthiness.

CRISP’s Rating Committee is composed of senior finance and economics professors at a leading
management school in the Philippines and specialists who are recognized industry experts engaged in
research and consultancy work for major companies and institutions in the country. The academic
discipline and rigor required in conducting credit risk research create a high premium on the academic
background of CRISP’s senior analytical staff.

CRISP Credit Rating Process

a. CRISP provides credit rating services for debt obligations by private and public
entities. Private entities include organizations registered and authorized by the Securities and
Exchange Commission to issue debt instruments for sale or re-sale in the market. Public entities
shall include local government units, government owned corporations, or national government
agencies authorized to issue debt instruments.
b. The credit rating process at CRISP officially begins with a written rating request from the debt
issuer or its duly certified representative.
c. A team of credit rating analysts is assigned by CRISP management to the issue to initiate a
review of the documents and information submitted by rating applicants and to determine the
additional documents and information that are necessary to commence the rating process.
d. Ratings assigned by CRISP are based on data submitted by the issuer that include the
company’s audited financial statements for at least three fiscal years, feasibility studies and
historical and projected market share. CRISP analysts are expected to conduct a field visit to
help their assessment of the issue’s market and meet the management team of project proponent.
e. CRISP management may opt not to conduct a field visit if documents submitted and
management meetings were deemed adequate to perform an assessment of the proposed project.
f. When all the necessary documents and information are submitted, presented and discussed by
the issuer, CRISP analysts shall then proceed to convene a rating committee meeting to present
their report, analysis and rating recommendation. After deliberation on issues that include the
project’s market feasibility, industry and economic trends, members of the rating committee will
assign a rating to represent their assessment of the factors that may affect the creditworthiness of
the project proponent.
g. The CRISP analyst assigned to the issue will then communicate the results of the rating
committee deliberations and discuss with the issuer or its authorized representative the factors
that led to the determination. Issuers may appeal a rating decision by the committee and submit
new information that has not been initially submitted to CRISP.
h. Appeals are taken up by the committee only if new information is submitted. Based on new
information, the rating committee may or may not change the earlier rating assignment to the
issue.

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AND STRICTLY NOT FOR PUBLIC UPLOAD
CRISP Rating Codes for Short-Term Debt
A1 : Debt rated ‘A1‘ reflects strongest capacity to repay debt obligations.
A2 : Debt rated ‘ A2 ‘ reflects very strong capacity to repay debt obligations.
A3 : Debt rated ‘A3’ reflects strong capacity to repay debt obligations.
B1 : Debt rated ‘ B1 ‘ reflects adequate capacity to repay debt obligations but demonstrates some
vulnerability to changes in economic conditions, industry shifts and business circumstances.
B2 : Debt rated ‘ B2 ‘ reflects current capacity to repay debt obligations but demonstrates significant
vulnerability to potential changes in economic conditions, industry shifts and business
circumstances which could lead to a weakened position to repay debt.
B3 : Debt rated ‘ B3 ‘ reflects current capacity to pay debt but demonstrates impaired capacity to
repay debt with potentially unfavorable changes in economic conditions, industry shifts and
business circumstances.
C1 : Debt rated ‘C‘ reflects speculative position to repay debt. Although the issuer might reflect
some positive credit qualities its susceptibility to adverse conditions is very high and can
exacerbate its already weak capacity to repay debt
D : Debt rated ‘D’ indicates default when payments on a rated obligation was paid after the due
date. This rating will also be assigned should an issuer take actions to defer payments on a loan
obligation through bankruptcy petition or similar moves that will result in delayed or non-
payment of principal and/or interest.

CRISP Rating Codes for Long-Term Debt

AAA : Debt rated ‘AAA‘ reflects strongest capacity to repay debt obligations.
AA : Debt rated ‘ AA ‘ reflects very strong capacity to repay debt obligations.
A : Debt rated ‘A’ reflects strong capacity to repay debt obligations.
BBB : Debt rated ‘ BBB ‘ reflects adequate capacity to repay debt obligations but demonstrates some
vulnerability to changes in economic conditions, industry shifts and business circumstances.
BB : Debt rated ‘ BB ‘ reflects current capacity to repay debt obligations but demonstrates significant
vulnerability to potential changes in economic conditions, industry shifts and business
circumstances which could lead to a weakened position to repay debt.
B : Debt rated ‘ B ‘ reflects current capacity to pay debt but demonstrates impaired capacity to
repay debt with potentially unfavorable changes in economic conditions, industry shifts and
business circumstances.
C : Debt rated ‘C‘ reflects speculative position to repay debt. Although the issuer might reflect
some positive credit qualities its susceptibility to adverse conditions is very high and can
exacerbate its already weak capacity to repay debt

D : Debt rated ‘D’ indicates default when payments on a rated obligation was paid after the due
date. This rating will also be assigned should an issuer take actions to defer payments on a loan
obligation through bankruptcy petition or similar moves that will result in delayed or non-
payment of principal and/or interest.

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AND STRICTLY NOT FOR PUBLIC UPLOAD
INTERNATIONAL CREDIT RATING AGENCIES: Fitch, Moody’s, and S&P

1. Fitch Ratings

Fitch Ratings is an international credit rating agency based out of New York City and London. Investors
use the company's ratings as a guide as to which investments will not default and subsequently yield a
solid return. Fitch bases the ratings on factors, such as what kind of debt a company holds and how
sensitive it is to systemic changes like interest rates.

The Fitch rating system is as follows:

Investment grade
• AAA: companies of exceptionally high quality (established, with consistent cash flows)
• AA: still high quality; still has a low default risk.
• A: low default risk; slightly more vulnerable to business or economic factors
• BBB: a low expectation of default; business or economic factors could adversely affect the
company

Non-investment grade
• BB: elevated vulnerability to default risk, more susceptible to adverse shifts in business or
economic conditions; still financially flexible
• B: degrading financial situation; highly speculative
• CCC: a real possibility of default
• CC: default is a strong probability
• C: default or default-like process has begun
• RD: issuer has defaulted on a payment
• D: defaulted

Fitch Ratings and Sovereign Nations

Fitch offers sovereign credit ratings that describe each nation’s ability to meet its debt obligations.
Sovereign credit ratings are available to investors to help give them insight into the level of risk
associated with investing in a particular country. Countries will invite Fitch and other credit rating
agencies to evaluate their economic and political environments and financial situations to determine a
representative rating. It’s very important to obtain the best sovereign credit rating possible, particularly
in the case of developing nations, as it aids in accessing funding in international bond markets. In 2018
Fitch awarded the United States with the highest AAA sovereign credit rating. On the lower end was
Brazil with a BB-.1 2

Fitch Ratings and Individual Credit Scores

While Fitch, Moody’s, and S&P ratings often correlate with companies, institutions, and nations many
credit rating agencies also offer individual credit scores. These play central roles in lenders’ decisions to
extend credit.

For example, those with credit scores below 640 are generally considered to be subprime borrowers, for
which lending institutions often charge higher interest than they would for a conventional mortgage.
This is in order to compensate themselves for carrying the additional risk. For subprime borrowers,
lenders may also require shorter repayment terms or a co-signer for borrowers with a low credit score.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
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2. Moody's Corporation (MCO)

Moody’s Corporation (MCO) is the holding company that owns both Moody's Investors Service, which
rates fixed income debt securities, and Moody's Analytics, which provides software and research for
economic analysis and risk management. Moody's assigns ratings on the basis of assessed risk and the
borrower's ability to make interest payments, and its ratings are closely watched by many investors.
• Moody's Corporation is an American financial services company that acts as the holding
company for Moody's Investors Service and Moody's Analytics.
• Moody's Investors Service provides investors with credit ratings, risk analysis, and research for
stocks, bonds, and government entities.
• Moody's Analytics develops software and tools to help capital markets with risk management,
credit analysis, and economic research.
• Through its rating system, Moody's assigns grades to bonds and stocks based on the risk
associated with the investment.
• During the 2008 financial crisis, Moody's and other credit rating agencies were criticized for
giving "AAA" ratings to mortgage-backed securities that in many cases were comprised of
subprime loans.
Investors worldwide pay close attention to the ratings that Moody's assigns to bonds, preferred stock,
and government entities. Moody's ratings go from Aaa, which is the highest grade for the top quality
issuer with the lowest risk, down to C, which is usually given to securities that are in default with
little chance for recovery of principal or interest.

Moody’s rating scale

Moody’s rating scale, which ranges from a maximum Aaa to a minimum C, consists of 21 notches and
two categories:
• Investment category for the financially sound companies.
• Speculative category for the companies with a higher risk of defaulting.
Categories Rating Rating Comments
Symbols notches
Aaa Highest quality, subject to the lowest level of credit risk
Aa1
Aa Aa2 High quality, subject to very low credit risk
Aa3
A1
Investment A A2 Upper-medium grade, subject to low credit risk
A3
Baa1 Medium-grade, subject to moderate credit risk and may
Baa Baa2 possess certain speculative characteristics
Baa3
Ba1
Ba Ba2 Judged to be speculative, subject to substantial credit risk
Speculative Ba3
B1
B B2 Considered speculative, subject to high credit risk
B3

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 Caa1 Speculative of poor standing and subject to very high
Caa Caa2 credit risk
Caa3
Speculative Ca Speculative and likely in, or very near, default, with some
prospect of recovery of principal and interest
C The lowest rated and typically in default, with little
prospect for recovery of principal or interest

3. Standard & Poor's

Standard & Poor’s specializes in providing credit ratings for bonds, countries, and other
investments, but that's just one of the thousands of financial market services offered by S&P Global.
The company uses its vast access to data to provide customized analysis and establish market indexes.
The most well-known index offered by S&P Global is the S&P 500.

The names "Standard" and "Poor" come from two financial companies that merged in 1941.
There is a level of irony in a company called "Poor's" measuring wealth, but that name came from one of
the company's founders, Henry Varnum Poor. In 1860, he published the “History of Railroads and
Canals of the United States.”1 The book was a product of Poor's concern about a lack of quality
information available to investors.2

His book planted the seeds of corporate transparency, and over the following 160 years, those
seeds grew into an advanced system of corporate and national credit ratings.
The S&P rating is a credit score that describes the general creditworthiness of a company, city, or
country that issues debt. The Standard & Poor's company rates how likely debt will be repaid from the
entity in question. The ratings are for informational purposes only—they aren't investment
recommendations, nor do they predict the probability of default. S&P also rates the creditworthiness of
individual bonds. There are several different types of bonds, all of which vary in their ratio of risk to
return.

S&P’s Ratings Scale

The following chart provides further detail on what each letter grade means for the issuing entity.

Letter Grade Grade Capacity to Repay

AAA Investment Extremely strong
AA+, AA, AA- Investment Very strong
A+, A, A- Investment Strong
BBB+, BBB, BBB- Investment Adequate
BB+, BB Speculative Faces major future uncertainties
B Speculative Faces major uncertainties
CCC Speculative Currently vulnerable
CC Speculative Currently highly vulnerable
C Speculative Has filed bankruptcy petition
D Speculative In default

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 S&P offers ratings on short-term debt, though on a slightly different scale. S&P also provides
outlook ratings, which attempt to project how the entity will be fairing in six months to two years,
compared to how it's doing now.5 Those ratings are positive, negative, stable, or developing.

Ratings by Agency in Banking Industry

Moody's Fitch S&P Meaning

Aaa AAA AAA Highest quality, lowest risk
Aa AA AA High quality, low risk
A A A Upper-medium quality, low risk
Baa BBB BBB Medium quality, moderate risk
Ba BB BB Speculative quality, substantial risk
B B B Speculative quality, high risk
Caa CCC CCC Poor quality, very high risk
Ca CC CC In or near default, possibility of recovery
C C In default, low chance of recovery, may still be paying
obligations
C D D Has defaulted on obligations, will likely continue to do so

Fitch Ratings also includes an "RD" designation, meaning restricted default, between C and D.
This indicates that the institution has defaulted on some financial obligations, but has not entered
bankruptcy or ceased operating.2

These ratings may be given modifiers to show higher degrees of nuance between them. Moody's
ratings may add 1, 2, or 3 to the letter rating. Standard & Poor may add + or -. For example, an AA+ is
equal to an Aa1 and is at the top end of the AA or Aa category. An AA- is equal to an Aa3 and is at the
lower end of the AA or Aa category.3 4 Credit ratings are not given once; they are reevaluated and
reassigned, sometimes at very different levels, depending on the current financial situation and level of
risk for the financial institution.

Credit ratings can impact customers differently depending on what type of business they do with
the bank. For example, if a bank’s creditworthiness goes into junk territory or even slumps for a while,
it’s possible that people who hold large open-ended loans could be affected. These include business lines
of credit and home equity loans. This is because when a bank is troubled, it needs to improve its
liquidity by preserving capital and therefore may have to pull in its credit lines, so you may lose
borrowing power. Sometimes troubled banks also will begin to close branches and lay off employees.
This won’t affect the safety of your deposits, but it can result in problems in your relationship with your
bank if they close your local branch. Banks with high-level ratings, however, aren't only trusted more by
customers. They are trusted more by government agencies local businesses, and international
corporations.

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PH gets credit rating affirmation from Moody's
By Joann Villanueva. July 16, 2020, 9:11 pm. Philippine news agency. Retrieved from:
https://www.pna.gov.ph/articles/1109235

MANILA – The Philippines continues to defy trends after Moody’s Investors Service on Thursday
affirmed its Baa2 rating with stable outlook on the country, Bangko Sentral ng Pilipinas (BSP) Governor
Benjamin Diokno said.
In a Viber message to journalists, Diokno said this latest decision by the debt rater is a welcome
development since the latter has downgraded the credit ratings of 18 sovereigns and revised to
“negative” the ratings outlook of 27 sovereigns as of last June.
“The affirmation from Moody’s, Fitch and S&P’s and the upgrade from Japan Credit Rating Agency
support our view that the pandemic hit the Philippines from a position of strength. While the economy
will contract this year, its prospects for a strong rebound next year and future years are bright,” he
added.
This affirmation follows the debt rater’s decision last May 12, wherein it kept its rating and ratings
outlook on the country despite changing its growth forecast for the domestic economy to a contraction of
0.2 percent for this year.
It, however, projected a growth rebound of 9 percent next year.
“The rating affirmation and stable outlook reflect Moody’s view that the fortification of the
government’s fiscal position in recent years provides a buffer against a rise in public indebtedness due to
shocks, such as the ongoing global coronavirus outbreak,” Moody’s Investors Service said.
It added that the country’s “track record of prudent economic and fiscal management, and a robust
banking system, contribute to the stable access to funding at moderate costs and support prospects for
fiscal consolidation and debt stabilization after the shock subsides.”
Aside from getting the credit affirmation from Moody’s, the Philippines also registered other milestones
recently after S&P Global Ratings affirmed its ‘BBB+’ rating with a stable outlook on the Philippines
last May 30.
Fitch Ratings on May 7 affirmed its BBB rating on the Philippines despite changing the outlook from
positive to stable on account of the economic impact of the coronavirus disease 2019 (Covid-19).
Last June 11, the Japan Credit Rating Agency (JCRA) upgraded its ratings on the Philippines from
BBB+ to A- with a stable outlook even as it forecast a contraction in growth this year.
It forecast domestic growth to expand by 6 percent to 7 percent in the medium term.
In a statement, Diokno said the country entered the Covid-19 pandemic “in a position of strength
characterized in part by healthy external accounts, sound and stable banking system, and manageable
inflation.”

These factors, he said, are complemented by “prompt, decisive, and extraordinary measures
implemented by the BSP and the national government to save lives and livelihoods, and to make sure we
emerge from this crisis stronger than before.”
Diokno said the central bank “has already done a long list of relief measures, and we stand ready to do
more if needed, especially as our policy space and tool kit are far from being exhausted.”

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“The affirmation of our credit rating by Moody’s – together with the recent favorable actions on the
Philippines by other credit rating agencies (CRAs) – show that important stakeholders from the
international community recognize that the Philippines is on the right track as far as managing the
effects of the Covid-19 crisis is concerned,” he added.
Finance Secretary Carlos Dominguez III described the pandemic as “a black swan that has shoved
countries, including the Philippines, into what is shaping up to be the world's worst economic downturn
since the Great Depression.”
“But what separates our country from most virus-hit economies is that we were caught up in this global
health crisis with ample buffers to cushion its fallout while keeping our debt level manageable and
without compromising our fiscal health,” Dominguez said.
With the current government’s prudent management of the economy along with the tax reform program,
“the Philippines has wielded enough fiscal space ahead of the deepening coronavirus crisis,” he said,
adding that this fiscal leeway enabled the government to formulate its PHP1.7-trillion recovery program,
which accounts for about 9.1 percent of domestic output as of May 2020.
"On the back of such strong fundamentals, the Duterte administration is committed to a calibrated
reopening of the domestic economy in order to quickly restore business and consumer confidence while
holding on to certain mobility restrictions and strict health protocols meant to further slow Covids-19
spread, save lives and protect communities," Dominguez said. (PNA)

Credit Management Association of the Philippines (CMAP)

The Credit Management Association of the Philippines was conceptualized in 1931 when some
credit men met and discussed the credit problems of their companies. They envisioned a need to form an
organization which would promote credit information interchange as well as foster fellowship and
camaraderie among credit men. This became a reality upon its formal incorporation on April 19, 1932 as
a non-stock, non-profit entity under the name Association of Credit Men (Phils.) Inc.

To keep up with the changing times in consonance with the growing recognition of the
increasing responsibilities of the credit profession, the Association changed its name to Credit
Management Association of the Philippines (CMAP) Inc. in 1967.

To date, CMAP has a membership of over 400 companies from the banking, financing, services,
trading manufacturing, and insurance sectors of the Philippines business. Affiliated with CMAP are
regional credit association from Visayas and Mindanao.

OBJECTIVES:
• To promote active and voluntary interchange amongst members thru mutual and reciprocal use
of quality credit information.

• To have a clear understanding of credit with the end in view of ensuring its proper use.

• To develop and nurture credit consciousness among credit practitioners.

• To instill discipline among credit users and credit grantors.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 • To contribute to the country’s economic development thru effective credit management.

The ledger interchange bureau of the Credit Management Association of the Philippines (CMAP)
is a source of information regarding the manner in which a customer meets his trade obligations. The
association provides the most economical means of obtaining the ledger experience of other suppliers
and often eliminates the need for other more expensive methods of investigating the customer's trade
payment habits.

Services
1. Credit Information Exchange is an exchange of credit and collection data through mutual and
reciprocal use of quality information.

2. Listing of Court Cases is a compilation of court cased filed in the different courts of Metro Manila,
Cebu and Davao in the following categories:
• Batas Pambansa #22
o (An act penalizing the making or drawing and issuance of a check without sufficient
funds or credit and for other purposes)
• Estafa
• Foreclosure
• Illegal Recruitment
• Ejectment
• Replevin
• Sum of Money
• Unlawful Detainer
• Swindling
• Falsification of Public Document
• Other Deceits

3. Listing of Returned Checks is a compilation of clients who issued check(s) which were dishonored by
the drawee bank submitted by CMAP's members.
4. Listing of Accounts Endorsed to Lawyers is a compilation of accounts endorsed to legal submitted by
the members of CMAP.
5. Listing of Past Due Accounts from telecommunication companies.
6. Listing of Past Due Accounts from manufacturing companies.
7. Publications are issued to allow members of CMAP to be updated on the activities through
newsletters published every other month and journals published semi-annually which featured articles
int eh field of credit and collection management and other related fields.
8. Seminars and Workshops are held covering topics on credit and collection management and other
related fields.
9. The Library has a wide collection of books, journals and other local and foreign publications for the
use of the members of CMAP.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
ADDITIONAL INFORMATION RELATIVE TO CREDIT EVALUATION

What Is an Internal Audit Report?

An internal audit report, just like other kinds of business report examples, can present the
proper documentation of the regulations of the business as well as how operations and
management areas are established and maintained. Hence, you have to make sure that you will
come up with a formal and professional discussion backed up by facts and figures when
developing an internal audit report.

If you are unaware of what an internal audit report is or if you have no idea on how to
develop this particular kind of business report, you first have to do your part in researching a variety
of information about the document like the content that you can expect from one before proceeding
to the actual drafting of the general report. To give you an idea about the specified matter, here are
some of the ways on how a basic internal audit report can be defined:

1. An internal audit report is a document that can help the business assess or even re-evaluate its
functions, operations, and management. With the help of this document, organizations can identify
whether they are doing and following the things specified in their regulations or if they are truly
trying to bridge the gap between the current condition of the business and the state of operations
that they would like to achieve. You may also see investigation report samples and examples.
With this, the business can make necessary changes to its strategies and action plans accordingly
to ensure higher chances of future or potential successes.

2. An internal audit report serves as the material that can discuss and reflect the work culture
within an organization. Through this document, it will be easier for stakeholders and external
auditors to have an overview of the general policies, regulations, and procedures that the business
follows as a corporate entity. Having an internal audit report, hence, can give more control when it
comes to the application of effective operations and the mitigation of risks and impacts of threat s.
Moreover, this document can also help the business comply with legal obligations, regulatory
requirements, and state laws. You may also like status report examples.

3. An internal audit report is a representation of all the internal audit programs that the business
executes in a particular time period. This document helps all concerned entities to be aware of the
monitoring and evaluation procedures of the business especially those that are involved in critical
business areas like total quality management, financial movement, and business resources and/or
assets safeguarding. You may also check out academic report examples.

What is an External Audit Report?

An audit is a process of investigating an organization’s processes, policies, or procedures
with the aim of identifying any potential issues and to provide solutions to these issues. In a way,
audit reports can also be called analysis reports. The type of audit that will be performed will
largely depend on the kind of organization being audited and the specific department or function of
the institution that will be audited. For example, if you are conducting an audit to review the
different ways that consumer data is obtained and used within your business, you would most likely
need to do a data audit and then create a data audit report.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 It specifically focusses on the creation of external audit reports. This kind of audit activity
refers to audit processes that are done by an external or third-party auditing firm. Different kinds of
audit activities can be called external audits if they are conducted by these third-party auditing
firms.

External audits are usually preferred if a company wants to ensure that the audit results or
findings are not biased or does not lean towards the interests of a specific department or individual
within the organization. You may also check internal audit reports. The creation of external audit
reports is made easier by using any of the different audit report templates that we have included in this
article. Browse through these templates and choose the one that you think will best fit the kind of
external audit process you wish to perform.

The Audit report provides SGBs with recommendations, recognition of good practice and
assigns an audit rating. Audit guidance; Good practice reports. An annual Good Practice Report is
produced from audits conducted in the previous year to encourage good relationships between SGBs
through the sharing of good practise.

Key Differences Between Internal Audit and External Audit

The following are the major differences between internal audit and external audit:
1. Internal Audit is a constant audit activity performed by the internal audit department of the
organisation. External Audit is an examination and evaluation by an independent body, of the
annual accounts of an entity to give an opinion thereon.
2. Internal Audit is discretionary, but the External audit is compulsory.
3. Internal Audit Report is submitted to the management. However, the External Audit Report is
handed over to the stakeholders like shareholders, debenture holders, creditors, suppliers,
government, etc.
4. Internal Audit is a continuous process while the External Audit is conducted on a yearly basis.
5. The purpose of Internal Audit is reviewing the routine activities of the business and give
suggestions for improvement. Conversely, External Audit aims at analysing and verifying the
accuracy and reliability of the financial statement.
6. Internal Audit provides an opinion on the effectiveness of operational activities of the
organization. On the other hand, External Audit gives an opinion of the true and fair view of the
financial statement.
7. The scope of internal audit is decided by Those Charged With Governance (TCWG). As opposed
to external audit, whose scope is determined by law.
8. Internal Auditors are the employees of the organisation as they are appointed by the management
itself, whereas External Auditors are not the employees, they are appointed by the members of
the company.

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
REFERENCES

Apolo, Jose T. (2003). Credit and Collection Management in the Philippine Setting, 2nd
Ed. pp. 52-72. http://202.71.179.165/cgi-bin/koha/opac-detail.pl?biblionumber=23336

CRISP Ratings. (n.d.). Crisp.Com.Ph. Retrieved December 17, 2020, from https://crisp.com.ph/

https://www.consumerfinance.gov/ask-cfpb/what-is-a-judgment-en-
1381/#:~:text=A%20judgment%20is%20a%20court,of%20a%20lawsuit%20in%20court.&text=Ignore
%20the%20lawsuit%2C%20or,lawsuit%20in%20a%20timely%20manner.
https://www.youtube.com/watch?v=O0rA5OT1uWw
http://www.cmaphil.com/portal/AboutCMAP/Services.aspx
https://www.liveoakbank.com/wine-and-craft-beverage-resources/the-5-cs-of-credit/
http://www.philratings.com/(S(ocuhtg2zindknq45fpeg5c45))/PhilratingsAd.pdf
https://www.inc.com/encyclopedia/credit-evaluation-and-approval.html
https://www.manilatimes.net/2019/04/26/supplements/cmap-history-objectives-and-services/545354/
https://alphabetaprep.com/cfa-level-1/fixed-income/issue-and-issuer-credit-ratings
https://nacm.org/ethics-a-standards.html
https://www.wisdomjobs.com/e-university/financial-management-tutorial-289/evaluating-individual-
credit-applicants-6692.html
https://www.cimbbank.com.ph/en/financial-literacy-articles/financial-essentials/what-is-credit-
score.html

The Journal of Lending & Credit Risk Management. Practices for the Exchange of Commercial Credit
Information. Retrieved from: https://www.questia.com/magazine/1G1-59493632/practices-for-the-
exchange-of-commercial-credit-information

Philratings. (n.d.). PhilratingsAd. Philratings.Com.Ph. Retrieved November 3, 2020, from

http://philratings.com.ph/(S(veymms455qqraongqwdfpv55))/PhilratingsAd.pdf.
Credit Reports in the Philippines. (2015, January 20). www.Imoney.Ph.
https://www.imoney.ph/articles/credit-report-philippines/.
Finscore.ph. (2020, March 13). Everything You Need to Know About Credit Rating.
www.Finscore.Ph.https://www.finscore.ph/guide-to-credit-rating-
philippines/#:~:text=Lenders%20in%20the%20Philippines%20use%20credit%20score%20rating
s,be.%20How%20is%20a%20person%E2%80%99s%20credit%20score%20determined%3F.
Investopedia. (n.d.-b). What Is a Bank Credit Rating? Www.Investopedia.Com. Retrieved
December 17, 2020, from https://www.thebalance.com/what-is-a-bank-credit-rating-4586357.
What is a Credit Score? Reading time: 2 minutes. (n.d.). Www.Equifax.Com. Retrieved December
17, 2020, from https://www.equifax.com/personal/education/credit/score/what-is-a-credit-score/.
The Guardian. (n.d.). Credit ratings: how Fitch, Moody’s and S&P rate each country.
Www.Theguardian.Com. Retrieved December 17, 2020, from
https://www.theguardian.com/news/datablog/2010/apr/30/credit-ratings-country-fitch-moodys-
standard.
Investopedia. (n.d.-b). Fitch Ratings. Www.Investopedia.Com. December 17, 2020. Retrieved from
https://www.investopedia.com/terms/f/fitch-ratings.asp
Moody’s rating scale. (n.d.). Www.Atlas-Mag.Net. Retrieved December 17, 2020, from

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD
 https://www.atlas-mag.net/en/article/moody-s-rating-scale.
Philippines - Credit Rating. (n.d.). Tradingeconomics.Com. December 17, 2020. Retrieved from
https://tradingeconomics.com/philippines/rating
Difference Between Internal Audit and External Audit. (2020b, July 16). Keydifferences.Com.
https://keydifferences.com/difference-between-internal-audit-and-external-
audit.html#:~:text=The%20following%20are%20the%20major%20differences%20between%20internal,
of%20an%20entity%20to%20give%20an%20opinion%20thereon

Acknowledgment to the following:

BASTIN BANTA FM 3-1

SHANAN JOY BAUTISTA FM 3-2
ERNESTO GABRIEL SALAS FM 3-3
WALLEN CAYCO FM 3-4

CMCP Adviser: Prof. Ragrciel G. Manalo FOR CLASSROOM AND READING PURPOSES ONLY
AND STRICTLY NOT FOR PUBLIC UPLOAD