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Companies are reducing the cost of borrowing on bank loans and bonds through mechanisms such as the “comfort letter”, “commitment letter” and equity guarantees that improve credit ratings by a few notches. Sebi would analyze the data following the Reserve Bank of India‘s (RBI) issuance of its reservations on the arrangements – describing them as “diluted and non-prudent support structures”.
According to the central bank, even seemingly more enforceable supports and widely used structures such as the “corporate guarantee” of the parent holding entity or group flagship can only be used to improve the credit rating if it There is a strict deadline for the invocation of the guarantee by the lenders.
“Rating companies have already submitted data on the number of companies receiving ‘credit enhancement’, the nature of the support taken for this purpose and the names of the companies. The RBI directive is aimed at banks that it regulates while the rules on the ratings of other negotiable debt instruments such as debentures are framed by Sebi which has enabled rating upgrades through supports…So this has created a situation where two regulators have positions divergent over the ratings on which companies raise thousands of crores of debt,” a senior industry official told ET.
ET had reported on May 19, 2022 that the ratings agencies had sought intervention from their lead regulator Sebi due to inconsistencies arising from the RBI directive. Left unaddressed, this causes a confusing situation in the market where a company’s listed debentures (regulated by Sebi) would have a higher credit rating than bank loans (which fall under RBI’s jurisdiction).
A corporate guarantee is a promise made by the parent company to assume the debt of a group company if the latter does not repay or service a loan. (ET had first reported on April 27, 2022 on the RBI’s statement to banks.) RBI, in an April 22 letter to CEOs of ratings firms, had observed that a review had found there was a “wide variation among credit rating agencies in the nature of support considered, mechanism and assessment methodology when assigning these ratings”.
Borrowing companies as well as rating agencies sensed that the rules of the game (to improve ratings through support structures) were going to change very soon. “I think the differences between Sebi and RBI are temporary and would soon be settled with a common set of credit enhancement rules for loans as well as debentures. But it is now clear that a company that is not able to provide a watertight corporate guarantee that the careful due diligence of rating companies cannot reduce its cost of borrowing – something they have been doing for years,” the compliance officer said. of a large private bank.
Rating agencies also expect Sebi to deal with the pitfalls of rating companies not cooperating to share their financial and other information. “This is a particular problem for unlisted companies that do not have to periodically disclose sensitive figures and information to stock exchanges. Not only do these companies withhold information from rating agencies, even their bankers protect it and are reluctant to talk about a default that only the banks in the consortium know about,” said an official from a rating company. Nearly 90% of the 50,000 credit ratings are for bank loans. Banks prefer rated loans because a lower regulatory risk weighting on these rated assets allows them to allocate slightly less capital and improve the capital adequacy ratio.
A few years ago, rating agencies told regulators they should be allowed to withdraw the ratings of around 15,000 companies that don’t cooperate. “The problem is that rating agencies need a ‘no objection certificate’ from lending banks before they withdraw ratings, and banks usually drag their feet on this. This was brought up a few years ago Hopefully a solution would be found now that Sebi has a new leader and a lot of changes have happened within Sebi,” an official with a debenture administrator said.
