Rating agencies ask RBI to come up with default recognition criteria – Mintpaisa

Credit rating agencies asked the Reserve Bank of India (RBI) last week to clarify ‘recognition of default’ criteria, which determine the extent to which missed or delayed payment of a type of debt affects the rating of another debt contracted by a borrower.

As the central bank and capital market regulator, the Securities and Exchange Board of India (Sebi), part ways over how different types of debt would be rated in the financial market, ratings firms want the RBI issue a public statement. on the recognition of the defect.

Even a day’s delay or non-payment of a single rupee by a corporate borrower lowers the agency’s credit rating on a bank term loan to “default grade” or “D”. . Under current practice, this automatically triggers a downgrade of the non-convertible debenture (NCD) to “C” (indicating a high risk of default in the timely service of financial obligations). The NCD downgrade occurs even if the company that issued the security (and which defaulted on its term loan from the bank) does not default on payment to NCD investors. In the event of a default on a cash credit or a working capital loan granted by a bank, the downgrading takes place if the account remains irregular for 30 days.

Bank lending is regulated by the RBI while publicly listed corporate debt securities fall under Sebi. Over the past year, the two financial market regulators have expressed their differences over credit rating principles and have stuck to their respective positions despite repeated statements from ratings companies, fearing that diverging ratings on two types debt of the same company does not sow confusion among investors. After Sebi issued the operational guidelines on the rating of securities a fortnight ago, it became abundantly clear that rating companies would simply follow the market regulator’s standards when rating debt securities and would strictly adhere to RBI guidelines when rating bank loans.

With credit rating rules clearly delineated between loans and securities – as defined by the two regulators – rating companies are seeking clarity on how a debt’s rating movement (under one regulator) would influence a other debt (under the other regulator). “RBI should put in the public domain that the default recognition rule that currently applies would continue under the current framework. It is important. And RBI should announce it by January 31, as the new Sebi operating guidelines will come into effect on February 1,” an industry person said.

The old turf fight between the two regulators came to the fore again in early 2022 when RBI, in a guidance note to rating agencies, said ratings assigned to corporate loans cannot be raised on the back of “diluted and non-prudent support structures”. » such as letter of comfort, letter of support or undertaking, and other cover such as pledge of shares. Such support from the parent company or promoters has allowed companies to reduce the cost of borrowing – the higher the rating, the lower the interest charges on debt.

RBI also asked them to refrain from giving a higher rating on the back of ‘debtor-co-debtor structures’ – joint arrangements by infrastructure companies where multiple special purpose vehicles housing separate projects pool their cash flows to create a mechanism where funds from one SPV can be used to pay off the debt of another vehicle that is cash-strapped. Thus, any support for a bank loan must be backed by a firm and legally enforceable guarantee. However, with Sebi allowing rating agencies to factor in the support of structures in rating debentures, the differences between the two regulators were evident.

“Rating agencies can seek further clarification from both regulators to address operational issues. Another area where clarity may be needed is whether the stand-alone rating of companies should be given separately when the rating takes into account ‘implied guarantee’ or parent company support,” another person said.

Some companies benefit from higher ratings, as demonstrated in the past by their parent company or sponsor group to help group companies avoid defaults. “So while there are no black-and-white guarantees, the common brand, group reputation, synergies and past experience come into play to give the rating a ‘top notch’. It is difficult to separate and give the standalone rating in such cases,” another person said. “In addition, Sebi should clarify that its rules also apply to unlisted debt securities,” he said.

There can be six main types of debt: ordinary listed and unlisted securities; listed and unlisted securities with support or credit enhancement structure; and bank loans (with or without firm guarantees). Nearly 90% of the 50,000 debt ratings relate to bank loans. Banks prefer rated loans which carry lower risk and lower capital requirements.


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