What Do Rating Agencies Look at During Surveillance?

Surveillance reviews revisit the same core risk pillars as the original rating — business risk, financial risk, management and governance, liquidity — with particular attention to whether previously identified sensitivities have improved, stabilised, or worsened, since that comparison against a documented prior baseline is what makes surveillance analytically distinct from a first-time assessment.

Financial Performance Relative to Expectations, Not Just in Isolation

Beyond simply looking at whether revenue and profit grew in absolute terms, agencies assess performance against what was specifically projected or discussed at the previous review. A company that grew profit 8% but had itself projected 15% growth is examined rather differently from one that grew profit 8% broadly in line with a more conservative plan it had shared previously — the gap between projection and actual outcome is itself informative about forecasting discipline, business predictability, and, over multiple cycles, the general reliability of management's forward guidance.

This comparison against prior guidance becomes progressively more informative the longer a rating relationship continues. A single year of underperformance against projection might reasonably be attributed to an unforeseeable external factor; a repeated, multi-year pattern of optimistic projections consistently followed by more modest actual results tends to erode analyst confidence in future projections presented by the same management team, independent of how any single year's numbers look in isolation.

Movement in the Core Ratio Set, Examined Together Rather Than in Isolation

•      Leverage — has Debt/EBITDA and Debt-to-Equity moved, and in which direction, relative to both the prior year and to broader sector norms the agency tracks across its rated portfolio

•      Coverage — have Interest Coverage and DSCR held steady, improved, or weakened, and does the trend suggest a temporary fluctuation or the early stage of a more sustained shift

•      Liquidity — has available headroom under bank facilities and cash buffers strengthened or thinned over the period, and how does this compare with the company's near-term maturity schedule

•      Working capital — have receivable, inventory, and payable days moved meaningfully, and if so, does the underlying cause reflect a deliberate strategic choice or an emerging operational or collection issue

Material Business Developments and Their Longer-Term Implications

Any significant change to the business itself — new contracts won or lost, capacity added or idled, entry into a new product line or geography, a meaningful shift in competitive position — is assessed both for its immediate, near-term financial effect and for its longer-term implication for the underlying business risk profile, since some developments matter mainly for what they signal about the company's future trajectory rather than for their immediate impact on this year's numbers.

For instance, a single new contract win might have only a modest effect on the current year's revenue if it commences late in the period, but could still be treated as a meaningfully positive development if it represents genuine diversification away from a previously concentrated customer base, since the longer-term business risk implication outweighs the smaller near-term financial one.

Governance Developments Tracked Across the Full History, Not Just the Latest Year

Surveillance specifically tracks changes in related-party transaction volumes, board composition, promoter shareholding, and the timeliness and transparency of financial disclosure, since these factors can shift gradually in ways that are easy to miss when looking at any single year in isolation, but become considerably clearer when examined across a multi-year surveillance history that the agency, uniquely, has direct visibility into.

This is one of the genuine analytical advantages surveillance provides over a first-time rating: a first-time analyst sees only a snapshot of governance practices at one point in time, whereas a surveillance analyst several cycles into the relationship can observe whether governance practices are genuinely improving, holding steady, or quietly deteriorating over an extended period — a trend that is considerably more informative than any single year's observation.

Progress Against Previously Flagged Sensitivities as the Central Organising Question

This is, in many respects, the single most decisive input into a surveillance review, and understanding this should shape how a company approaches its own preparation. If the prior rationale explicitly stated that a leverage reduction below a certain threshold could support an upgrade, or that continued liquidity thinning could trigger a downgrade, the surveillance review is substantially organised around checking exactly that specific point — making the previous rationale a genuinely predictive document for what the next review will scrutinise most closely, rather than simply one input among many equally weighted considerations.

How Agencies Weigh Conflicting Signals Within a Single Review

It is common for a surveillance review to surface a mix of favourable and unfavourable developments simultaneously — margins might have improved while leverage rose, or liquidity might have strengthened while a key customer relationship weakened. In these cases, the rating committee weighs the relative significance and durability of each factor rather than mechanically netting them against each other; a small, temporary improvement generally does not offset a larger, more structural deterioration, and vice versa, which is why the committee's qualitative judgement remains central even when much of the underlying analysis is quantitative.

Illustrative Example

A hypothetical pharmaceutical formulations company's prior rationale cited two specific sensitivities: sustained EBITDA margin above 18% to support the current rating level, and any leverage increase beyond 2.5x Debt/EBITDA as a potential downgrade trigger. During the annual review, the agency finds margins held at a healthy 19.2%, comfortably above the stated threshold, but also notes that a new, debt-funded capacity expansion has pushed leverage to 2.8x, modestly beyond the flagged trigger level.

Rather than a straightforward, mechanical affirmation or downgrade based on either metric in isolation, this combination — one sensitivity holding comfortably, another technically breached — leads the committee into a more detailed discussion of whether the expansion's expected future cash flow contribution, once the new capacity ramps up, justifies treating the near-term leverage increase as a temporary, well-understood deviation rather than a genuine structural deterioration. The committee ultimately affirms the rating with a revised commentary explicitly noting the leverage increase and setting a specific timeline against which the expected deleveraging, as the new capacity contributes to EBITDA, will be checked at the next review — illustrating how surveillance decisions genuinely weigh multiple, sometimes offsetting, factors together rather than applying any single ratio as an automatic, mechanical trigger.

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Disclaimer: This article is intended for general informational and educational purposes only and does not constitute financial, credit, investment, or legal advice. Credit ratings are assigned solely by SEBI-registered Credit Rating Agencies (such as CRISIL, ICRA, CARE Ratings, India Ratings, Brickwork, Acuite, and Infomerics) based on their own methodologies, policies, and the information available to them at the time of assessment. FinMen Advisors provides preparatory and advisory support to companies undergoing a rating exercise and does not issue, influence, or guarantee any rating outcome. Readers should exercise independent judgement and consult qualified professionals before making business or financial decisions.