Credit rating agencies (CRAs) have often been caught napping as they failed to foresee crises in the debt market. SEBI has now put them on notice.

The capital market regulator on Tuesday asked credit rating agencies to analyse the deterioration in the liquidity conditions of the issuer and take into account any asset-liability mismatch while reviewing ratings. Experts say the signals from such analyses could align the ratings with market dynamics. Institutions such as the beleaguered IL&FS may not remain ‘AAA’ in the face of deteriorating fundamentals.

Besides, rating agencies will also have to disclose any linkage to external support for meeting near-term maturing obligations. SEBI also introduced a specific section on liquidity among key rating drivers to highlight parameters such as liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation among others.

“SEBI’s direceive has potential to make ratings more dynamic and align even to short-term market changes,” said JN Gupta, former ED, SEBI, and founder of shareholder advisory firm. “SEBI’s new guidelines could make CRAs pro-active; the ratings will hinge less on historical data and more on current and future risks or trends.”

SEBI said that rating agencies need to review their rating criteria with regard to assessment of holding companies and subsidiaries in terms of their inter-linkages, holding company's liquidity, financial flexibility and support to the subsidiaries among others. “While carrying out ‘monitoring of repayment schedules’, CRAs shall analyse the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch,” SEBI said.

Also, while reviewing ‘material events’, CRAs need to treat sharp deviations in bond spreads of debt instruments vis-a-vis relevant benchmark yield as a material event.

Disclosure on parent co

To further strengthen disclosures, SEBI said that if a subsidiary company gets support from the parent group or government, credit rating agencies will have to name the parent company or government that will provide support towards timely debt servicing. Rating agencies will also have to provide the rationale for this expectation.

In case subsidiaries or group firms are consolidated to arrive at a rating, then rating agencies will have to list all such companies, and the rationale of consolidation should be provided under the heading.

CRAs need to publish their average one-year rating transition rate over a five-year period, on their respective websites, which would be calculated as the weighted average of transitions for each rating category, across all static pools in the five-year period.

Each CRA needs to furnish data on sharp rating actions in investment-grade rating category in a specified format to stock exchanges and depositories for disclosure on its website on a half-yearly basis, within 15 days from the end of the half-year.

Crisil reacts

Somasekhar Vemuri, Senior Director, CRISIL Ratings, said the agency always analysed aspects on parent support, consolidation, liquidity and factored them in the rating analysis. Enhanced disclosures on parent support, approach towards consolidation and liquidity will give investors more clarity on the rating drivers and assist in their own analytics.

“Publishing transition statistics will help investors get a perspective on the quality of ratings especially rating stability — an integral part of evaluating the performance on any CRA. This along with the default statistics will enable comparison of performance across CRAs. Bringing default and transition statistics under the purview of internal audit will also ensure their integrity. This will equip investors to make more informed decisions and be more discerning when comparing different ratings,” Vemuri said.

He is further of the view that sharp rating changes create an element of surprise and suddenness to the investors and CRAs should strive to keep them to a minimum.

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