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At a time when AAA-rated firms have gone into defaults, rating agency Crisil has said that global and national AAA ratings cannot be compared as they are done on different scales and are relative to a country’s rating.
“Comparing, the 276 AAA ratings that Indian credit rating agencies have assigned with, nine by S&P Global Ratings or 53 by Moody’s is erroneous, and would tantamount to equating differing scales such as Celsius and Fahrenheit,” Crisil said in a release on Tuesday.
It said that credit ratings are relative assessments of credit risk and the relative benchmarking can be national, global or regional, it further said. In fact, if the nearly 32,500 rated Indian companies were to be assessed on the global scale, Crisil said they would be rated between BBB category and D on the global scale because India’s sovereign rating (in the BBB category) will usually serve as a ceiling.
AAAs in India make up for only 0.85 per cent of the overall rated universe, it further said, adding that it is lower compared to countries such as China and South Korea.
Defaults galore
The comments come at a time when rating agencies are under the spotlight after they failed to alert investors about potential defaults by companies such as IL&FS and Amtek Auto. Crisil has, however, not rated these companies.
Crisil further said that for an entity to have a AAA rating on a global scale, it will require an “extraordinarily strong” balance sheet that can withstand stresses on a world scale, and manoeuvre complex international business environments. However, this limits its debt levels and gearing headroom for growth.
“Over the past decade or more, companies in the developed economies have relied more on debt in their quest to increase shareholder value. When reliance on debt increases, financial risk also rises, leading to a lowering of credit ratings,” said Says Gurpreet Chhatwal, President, Crisil Ratings. The agency also said the quality of ratings on any scale is best judged by the default and stability rates of the ratings, rather than the absolute number of AAAs.
“The 1- and 3-year default rates of Crisil AAA-rated entities are 0 per cent,” said Somasekhar Vemuri, Senior Director, Centre of Excellence, Crisil Ratings, adding that they are marginal for global credit rating agencies as well.
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