Companies reduce the cost of borrowing on bank loans and bonds through mechanisms such as ‘letter of comfort’, ‘letter of undertaking’, and stock collateral which improve credit ratings to some extent. SEBI will analyze the data reserve Bank of India ,reserve Bank of India) expressing its objection to these arrangements – describing them as “thin and non-judicious support structures”.
According to the central bank, apparently more enforceable backing and widely used structures such as ‘corporate guarantees’ from the parent holding entity or group flagship can be used to raise credit ratings when Have a strict timeline on the invocation of the guarantee. ,
“The rating companies have already submitted data on the number of companies with ‘credit enhancement’, the nature of support taken for the purpose and the names of the companies. RBI’s directive is to the banks which regulate it during the regulations on ratings. Other tradable debt instruments like debentures floated by SEBI have allowed ratings to be improved through backing… a senior industry executive told ET.
ET reported on May 19, 2022 that rating agencies have sought the intervention of their primary regulator SEBI due to the contradictions that emerged after the RBI directive. Ignored, this causes a confusing situation in the market where listed debentures (regulated by SEBI) of a company will command a higher credit rating than bank loans (which are under the purview of RBI).
A corporate guarantee is a promise by a parent to assume the debt obligation of a group company if the latter fails to repay or service the loan. (ET first reported on the RBI’s release to banks dated April 27, 2022.) A review by the RBI on April 22 to the CEOs of rating companies had observed that “among credit rating agencies There was wide variation in nature. Support, evaluation mechanism and methodology were considered while providing such ratings”.
Corporate borrowers as well as rating firms have realized that the rules of the game (to raise ratings through support structures) will change very soon. “I think the differences between SEBI and RBI are temporary, and will soon be resolved with a common set of rules on credit enhancement for loans as well as debentures. But now it is clear that a company that is undisputed corporate Unable to give guarantees, the compliance head of a large private bank said the legal scrutiny of rating companies may not reduce their borrowing costs – something they have been doing for years.
Rating agencies also expect that SEBI will deal with the loss of rating companies who do not cooperate in sharing their financial and other information. “This is especially a problem for unlisted companies, which are not required to make periodic disclosures on numbers and sensitive information to stock exchanges. Not only do such companies withhold information from rating agencies, even That their bankers also protect them and are reluctant to talk about a loan default, about which only consortium banks are aware,” said an official of a rating company. Of the 50,000 loan ratings, close to 90% are on bank loans. Banks prefer rated loans because the lower regulatory risk weight on such rated assets allows them to set slightly lower capital and improve capital adequacy ratios.
A few years ago, rating companies told regulators that they should be allowed to withdraw the ratings of around 15,000 companies that are not cooperating. “The problem is that rating agencies require a ‘No Objection Certificate’ from lending banks before they can remove a rating, and banks usually drag their feet on this. This was raised a few years ago. Hopefully, now Some resolution will be found that SEBI is a new head and there have been a lot of changes within SEBI,” said an official of a debenture trustee.