ICRA launches new credit rating system for infrastructure

Rating agency ICRA Ltd on Wednesday announced the country’s new credit rating system for the infrastructure sector, in line with the announcement made in the budget 2016 document.

"The new rating framework will be a comment on the expected loss of a project entity, which would factor in the probability of default and the recovery prospects," the agency said in its media statement.

The new credit system was part of the 2016 budget announcements made for the infrastructure sector. The new system was to give emphasis to various inbuilt credit enhancement structures instead of relying upon a standard perception of risk which may result in mispriced loans due to a lower credit rating.

The new system for infrastructure projects has been developed in consultation with the Ministry of Finance and associated stakeholders. "The new rating system will focus on the overall recovery of dues by the investor/lender, a metric that can be evaluated subsequently, making this scale amenable to get itself evaluated for its differentiating and predictive capability," the note said.  Under the new rating scale, final ratings will be assigned on expected Loss on the scale from [Infra] EL 1 to [Infra] EL 7, where instruments rated ‘EL 1’ would be considered to be having the lowest expected loss and instruments rated ‘EL 7’ the highest.

"As experienced in both domestic and international markets, the default/loss risk in case of infrastructure projects reduces significantly once they achieve stabilisation phase. In order to adequately incorporate these distinct and unique characteristics, a new credit rating system for infrastructure projects has been developed," ICRA said in its statement.

Further explaining the difference between the traditional rating system and the newly launched one, the rating agency said, "The conventional ratings, based on the concept of 'single day, single rupee' delay, tend to be constrained on account of relatively short debt tenure, compared to the overall economic life of the project, unpredictable ramp-up periods, and cash flow volatility, resulting from risks pertaining to counterparties, markets and operations."

The new system is expected to help the infrastructure sector find better funding options. "The adoption of the proposed rating system for the infrastructure sector will enable better risk-based pricing and can also help in opening up long-term funding avenues for the sector. This will be significantly useful in case of fundamentally strong projects which face temporary cash flow mismatches during the extended lifecycle of the project," said Shubham Jain, Vice President, ICRA Ltd.