Us-Based Capmac To Offer Credit Rating On Rent

US-based CapMAC Holdings which rents credit rating is setting up shop in India and will offer credit enhancement products to Indian corporates. By renting these credit ratings Indian corporates, in the future, might be able to pierce the sovereign rating of the country while raising funds abroad.

CapMAC plans to set up a company in India which would extend financial guarantees to Indian companies. This would enable a corporate, which has a rating lower than that of CapMAC, to upgrade its rating for a domestic issue. With an enhancement in rating the company will be able to raise funds at a much cheaper rate. For instance, if a company has a double A rating and it purchases a financial guarantee from CapMAC, the company will get the credit rating of CapMAC.

 

Currently, CapMAC has a AA- rating in the international markets. However, since it is setting up a different company in India the rating is expected to be much higher, depending on the capitalisation and the assets it will hold on its books. The ratings will be rented for a fee to corporates requiring credit enhancement.

CapMAC is in favour of setting up a local company, as providing financial guarantees from the parent outfit will be detrimental to the rating of the parent. Since, Indias rating is still in the speculative grade, providing Indian companies with financial guarantees will adversely affect CapMACs global rating.

By setting up a company in India, CapMAC will be able to separate the risk profiles of the local and the International entity. But, sources point out that CapMAC will have to be strongly capitalised to provide top grade ratings to Indian entities.

Under the scheme of CapMAC, in case a company which has taken the credit rating on rent, defaults, CapMAC will pay the investors. CapMAC would then try and recover the money from the company. CapMAC, as a policy, does not provide rating enhancement to default grade companies.

CapMAC analyses the assets of any entity buying the financial guarantee to see if they are capable enough to cover the liabilities arising out of a default. Sources point out that even if a company has a very bad rating, but has large undervalued assets, CapMAC can provide the financial guarantee to enhance the credit rating.

The business of financial guarantee which started in the early 70s is worth over $ 1 trillion. However, the business of enhancing credit ratings is much smaller.

Rented credit ratings will enable corporates to pierce the sovereign rating.