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The Fitch Ratings logo.  (REUTERS)
The Fitch Ratings logo. (REUTERS)

Rating agencies, borrowers show signs of discord over mistrust

  • Sebi has said if rating agencies feel that delays in repayment were solely due to the lockdown, they may not consider it as a default
  • Rating agencies are in a peculiar bind as they are expected to show leniency to firms defaulting on repayments

Regulators may have advised that borrowers need to be dealt with leniently during the covid-19 outbreak and the resultant lockdown, but lack of mutual trust between rating agencies and issuers of debt papers threatens to escalate to a larger conflict.

The Reserve Bank of India (RBI) has declared a moratorium on bank loans for three months. However, the Securities and Exchange Board of India (Sebi) is hesitant to grant a similar moratorium on debt market instruments.

The market regulator, on 30 March, had said if rating agencies feel that delays in repayment were solely due to the lockdown, leading to operational challenges, they may not consider it as a default. This open-ended and ambiguous statement has led to different interpretations by companies and the rating agencies.

Rating agencies are particularly in a peculiar bind - they have been castigated in the past few years for laxity in recognising deteriorating financials of various companies, including financial entities, but are now expected to show leniency to those defaulting on their repayments.

The first instance of disagreement was seen when Indiabulls Housing Finance Ltd moved the Delhi High Court against Icra’s decision to downgrade its credit rating. Indiabulls Housing Finance said in a regulatory filing on 6 April that "Icra has reaffirmed the long-term rating of Indiabulls Housing Finance to AA (outlook negative)", adding that it "has withdrawn its petition against Icra from the Delhi high court".

"Icra has a robust process in place to protect the independence and objectivity of its credit ratings. Icra strictly adhered to its internal policies and all applicable Sebi regulations in assigning the rating, including following the appropriate appeal process," the rating agency said in an emailed statement to Mint on Thursday.

Edelweiss Financial Services also filed a writ petition at the Bombay High Court against Icra’s decision to downgrade its debt. A person familiar with the matter told Mint that, in its petition, Edelweiss has sought time from Icra to give information regarding the impact of the covid-19 outbreak and lockdown on its debt.

"The NBFC is seeking time to give a proper assessment of impact of covid-19. In the current lockdown, it is getting difficult to obtain the relevant information. They need reasonable time post the lockdown. The financial position of the NBFC has in fact improved since the last rating review," said the person citied above.

Rating agencies have been granted these relaxations till June 2020 so that they can form an opinion and make full disclosures, said a Sebi official, who spoke on condition of anonymity. However, rating agencies are finding this unclear as the Sebi circular leaves this discretion in their hands. The issuers allege that rating agencies are unwilling to give them time to assess the impact of covid-19 and are pulling the plug.

According to two rating agency officials, not all borrowers are facing difficulties due to the lockdown as several were stressed even before the covid-19 pandemic. They believe that borrowers are using this as an excuse to seek relief from courts, despite their troubles not being solely because of the coronavirus disruption.

“Sebi has never said we cannot downgrade a company’s ratings during the lockdown. What it said in the 30 March notification is rating agencies may not downgrade ratings to default," said the first ratings official cited above, adding that if borrowers can simply go to courts and get a rating reversed, then it sets a bad precedent for the industry.

Typically all instruments are rated by two agencies and the rating reversals will cause a problem for others, the second rating agency official cited above said. “What if one agency takes the call of not changing the rating and other one changes the rating for the same set of facts?" asked the official.

These rating agencies, which drew flak following the collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018, are being overly cautious in believing borrowers this time. Regulatory action against three rating agencies--Icra Ltd, India Ratings and Research Pvt Ltd and Care--over alleged lapses in rating of IL&FS bonds have made them circumspect. A draft forensic audit report by Grant Thornton last year on the engagement of credit rating agencies with IL&FS had found instances of ratings being influenced in the company’s favour.

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