Rating firms in a spot over defaults before loan rejig

Mumbai: As Corporate India and banks prepare to rejig loans and stay afloat, credit rating agencies are caught in a Catch-22 situation.In the absence of any regulatory direction, rating agencies are in a dilemma over downgrading a company which defaults before multiple banks finally agree on a one-time loan restructuring plan.It will take a few months before all banks in a lending consortium sign on the restructuring proposal — which could include a lower interest rate, longer repayment tenor, an initial moratorium period, and the extent of haircut banks have to take following the changed terms.Agencies are unable to reach a consensus on what would be the rating action if a company defaults in the intervening period. A default on a bank loan, resulting in a downgrade of the company’s rating to ‘D’, would have serious and immediate market implications: a dip in stock price, a surge in bond yield, and higher capital requirements for lending banks (as risk weight rises when a borrower’s credit rating slips below investment grade).“However, an agency which keeps the rating unchanged, could be later blamed for misleading the market if the restructuring proposal falls through.. What do we do? Sebi is silent on this. It has largely left it to agencies. This can cause confusion. We will approach the regulator on this,” a senior official of a rating agency told ET.All that the regulator has said is if a loan restructuring is solely due to Covid-related stress or under the RBI framework, the agencies may not consider it a ‘default’.“But what about the interim period between a company applying for one-time restructuring (OTR) of loans and banks approving the proposal. It would take two to three months which is a long time in financial markets. What if the company defaults during this period?” said another person in the industry.A bank classifies a borrower account as ‘non-performing asset’ (NPA) if the interest or principal is overdue for 90 days; but, rating agencies have to immediately downgrade (and put the decision in the public domain) if the borrower misses payment even for a day.“It’s very difficult for a rating agency to ignore a default on the basis of a letter from a company claiming that it has applied for loan restructuring. Only, if there is a letter from the lead bank in the consortium that the plan has been agreed, an agency will keep a rating unchanged despite a default…This will take time. Also, all OTR proposals may not go through. Some banks may refuse to sign the inter-creditor agreement,” said a banker.77967775According to the RBI directive on OTR in the wake of Covid-19, only those borrower accounts shall be eligible for resolution under the framework which were not in default for more than 30 days with any lending institution as on March 1, 2020. Further, such accounts should continue to remain ‘standard’ till the date of invocation of the OTR plan when at least 60% of lenders representing not less than 75% of the value of outstanding credit facilities agree to go ahead with the resolution plan. While these conditions are necessary, they are not sufficient for an OTR to go through as the business model may no longer be viable or the promoter may fail to instil confidence. Besides, a ‘standard’ simply means an account which is not NPA; a rating agency, however, is expected to step in as soon as there is a default which is long before an account turns NPA. More than 40,000 companies are rated in India.

from Economic Times https://bit.ly/3i6GSgG
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