Ratings of Debt Instruments of PSEs Referred Under IBC

India Ratings and Research (Ind-Ra) assigns ratings to the debt instruments of a public sector enterprise (PSE) on the basis of its security feature instead of assigning the issuer any rating. Credit enhancers commonly used by PSEs include government guarantee, budgetary support and escrow account. Therefore, different instruments of the same PSE can have different ratings, depending on the security feature embedded in the instrument.

Considering PSEs fall under state control and their business plans are largely influenced by the development priorities of the government (state or central), they receive support in the form of equity, grants, soft loans and others, which are part of the budget (central as well as state). Moreover, given the majority of PSEs have low profitability levels, they seek state support in the form of guarantees to borrow from financial institutions or debt market.

After the Insolvency and Bankruptcy Code, 2016, (IBC), came into effect from 1 December 2016, several cases have been referred to National Company Law Tribunal for resolution under the IBC. However, no PSE has been referred for resolution under the IBC so far.

In case a PSE is referred under the IBC for resolution, Ind-Ra will not undertake any rating action as long as the obligation of the guarantor remains intact and debt servicing is timely. Ind-Ra understands that the obligation of the guarantor remains intact and needs to be fulfilled in a timely manner even if the issuer were to be admitted into an IBC process.

Ind-Ra has so far observed that in case of rated debt, debt servicing by PSEs is generally timely, with the extent of delays/defaults extremely low. However, in case of unrated debt and inter-governmental debt, there have been delays.

This should be read along with the agencies published criteria 'Ratings of Public Sector Entities', dated 11 September 2015.

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