Sebi eases norms for rating agencies amid disruptions caused by Covid-19

The fear of high intensity of rating downgrades — with over Rs 2.59 trillion worth of debt papers being downgraded in February — was allayed to some extent on Monday, with the Securities and Exchange Board of India (Sebi) temporarily relaxing norms for rating agencies, in light of the operational disruptions caused by Covid-19. 

The markets regulator issued a circular stating that after the Reserve Bank of India’s (RBI’s) move to provide moratorium to banks on classification of non-performing assets (NPAs), rating agencies should also use their discretion to check if a default was solely on account of the lockdown or because of procedural delays in availing of the moratorium given by the central bank. If so, the rating agencies may choose not to consider such a delay as default.

The relaxation is being given for three months, in line with the RBI’s moratorium. Further, the market watchdog has given relaxation on rating action in case of delay by the company in providing information due to the lockdown. “However, rating agencies should endeavour to finish the exercise on a best-effort basis. Such cases shall be put up for ratification by the rating sub-committee of the board of rating agency,” the Sebi circular read.

Market participants have called it a timely move, but downgrades could still continue, with rating agencies likely to factor in current disruptions and grade debt papers.

 

 

“Raters may refrain from giving default or ‘D’ grade, but all other ratings remain on the table. Rating agencies may need more clarity from Sebi as it has not directed them to refrain from bringing down an instrument to below-investment grade, if it evaluates the company as unsuitable for fresh investment,” said a fund manager. In February, the quantum of downgrades had jumped 15x over the previous month. This was the highest value of corporate debt papers downgraded in nine months. However, it could not be ascertained whether the Sebi data has adjusted for multiple downgrades of same security.

Debt market participants said that while the RBI’s Rs 3.74-trillion liquidity enhancement would help good-quality corporates find avenues for refinancing, lower-quality bond issuers could see rating pressures amid disruptions in daily operations.  According to rating analysts, the moratorium by banks on classifying accounts as NPAs, coupled with lower financing costs, will help corporates with cash flow mismatches. However, revenue-related challenges will continue in the near term.

They added that airlines, hotels, tourism, malls, organised brick-and-mortar retail stores, multiplexes, and restaurants have been among the most vulnerable to rating action and weakening of credit profile. Under the existing regulatory framework, a ‘D’ or ‘default’ grade cannot be reversed to investment grade for a period of at least 365 days. 
 

Further, the regulations stated that a delay of one day or even one rupee has to be considered as default, and appropriate rating action should be taken.