Policy on Provisional Ratings

 

Last reviewed on: October 22, 2021


  1. Applicability of Provisional Ratings:
    1. Provisional ratings are assigned by Acuité to debt instruments, issuer ratings [corporate credit ratings (CCR)], where certain important actions and/or execution of certain documents governing the ratings are yet to be completed. These actions / steps may comprise, as applicable: .
      1. execution of letter of comfort, corporate guarantee, or other forms of explicit third-party support;
      2. execution of documents such legal agreements/ opinions, representations and warranties, final term sheet;
      3. assignment of loan pools or finalisation of cash flow escrow arrangements;
      4. setting up of debt service reserve account;
      5. opening of escrow account; or
      6. For a proposed Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT), only after receipt of SEBI Registration. However, the process of obtaining rating may commence at the stage of the sponsor filing with SEBI for the registration of the Trust, subject to a declaration from the sponsor to this effect being submitted to Acuite.
    2. Subsequently, upon receipt and execution of the requisite documents / completion of the required actions, the provisional ratings are converted into final ratings.

 

  1. Exceptions:

Acuité may assign a rating, including provisional rating, to a debt instrument / issuer evaluating strategic decisions, such as funding mix for a project, acquisition, debt restructuring, loan refinancing, except for assigning scenario-based ratings or advance ratings..

 

  1. Symbol for Provisional Ratings:

In case of provisional ratings (‘long term’ or ‘short term’), Acuité prefixes such ratings with the word "Provisional” e.g. in all communications like rating letter, press release / rating rationale, etc.

 

  1. Conversion of Provisional Ratings into Final Ratings:

Acuité shall convert the provisional ratings into final ratings as and when the terms such as execution of documents / complying with the conditions etc., as envisaged at the time of assignment of provisional ratings are fulfilled within the agreed time frame.

 

  1. Time frame for complying with the agreed terms, execution of documents and withdrawal of ratings:
    1. Acuité shall disseminate the provisional ratings through its website. The provisional ratings shall be converted into a final rating within 90 days from the date of issuance of the debt instrument. The final rating assigned after end of 90 days shall be consistent with the available documents or completed steps, as applicable.
    2. On a written request from the issuer, Acuité may grant an extension of 90 days on a case-to-case basis, solely based on the decision by the Rating Committee.
    3. Since CCRs for REITs / InvITs are not linked to placement of a specific debt instrument, the validity period for conversion from provisional rating to final rating shall be computed from completion of fund raising and issuance of units by the REIT / InvIT. The validity period for conversion shall be within 90 days, along with an extension of up to 90 days granted on a case-to-case basis by the rating committee, similar to cases involving issuance of debt instruments.
    4. Acuite shall not assign any provisional rating to a debt instrument upon the expiry of 180 days from the date of its issuance.
    5. Acuité will withdraw the Provisional rating in cases where the issuer fails to comply with the required actions / documentation within the applicable time period [as stated above in E i.) or E ii)],
    6. As part of the withdrawal process, Acuite will seek:
      1. Updated business information, financial statements (Audited / Provisional as applicable) & any other information it considers important / critical and management interaction.
      2. Payment of dues, if any.

      In case of non-cooperation by the rated entity with respect to any one or both of the above requirements, the rating(s) may be suffixed with "Issuer Not Cooperating” and simultaneously withdrawn.

 

  1. Effect on Rating Action in case of Material Changes:
    1. Acuité may withdraw the existing provisional rating, in case there are material changes in the terms of the transaction after the initial assignment of the provisional rating, where issuance is yet to happen.
    2. In some cases, there might be material changes in the terms of the transaction after the initial assignment of the provisional rating and post the completion of the issuance (corresponding to the part that has been issued). Under those circumstances, Acuité may withdraw the existing provisional rating and concurrently, assign a fresh final rating in the same press release, basis the revised terms of the transaction. Such withdrawal and simultaneous assignment of fresh rating shall be subject to inspection or examination by SEBI / other regulators, as applicable. The regulators shall review the materiality of changes in the terms of the transaction as well as appropriate documentation of investor consent to the change in terms.
    3. See Note 1 and Note 2 in the Annexure, where withdrawal and simultaneous assignment of fresh rating shall NOT apply.

 

  1. Disclosures in the press release / rating rationale:
  2. In addition to the disclosures already being made, Acuité shall include the following disclosures in press release / rating rationale while assigning provisional ratings:

    1. pending steps/ documentation considered while assigning provisional rating.
    2. risks associated with the provisional nature of the credit rating, including risk factors that are present in the absence of completed documentation / steps.
    3. rating that would have been assigned in absence of the pending steps/ documentation considered while assigning provisional rating. In cases where the absence of said steps/ documentation would not result in any rating being assigned by Acuité (for instance, in case of provisional rating for REIT/ InvIT – pending formation of trust), Acuite shall specify the same in the press release.
    4. While assigning provisional rating to a debt instrument proposed to be issued, the press release shall specify that in case the debt instrument is subsequently issued, the provisional rating would have to be converted into final rating as per the validity period / time frame prescribed in E i.) or E ii) (as applicable) above.
    5. While assigning provisional rating to an issued debt instrument, the press release shall specify the rating and timeline implications as per the validity period / time frame prescribed in E i.) or E ii) (as applicable) above.

 

  1. Disclosures in the press release / rating rationale in case of REITs and InvITs:
  2. Furthermore, in case of provisional ratings for REITs and InvITs, the following disclosures shall also be required, wherever applicable:

    1. The broad details of the assets that are proposed to be held by the REITs/ InvITs, the proposed capital structure, etc.
    2. The rating rationale should disclose that Acuité has taken an undertaking from the sponsor stating that the key assumptions (relating to the assets, capital structure, etc.) are in consonance with the details filed by the sponsor with SEBI.
    3. In case of change in provisional rating due to change in aforesaid key assumptions, the press release shall state that the rating by Acuite is based on a declaration from the issuer that similar changes have been made in the filing with SEBI.
    4. Acuité may approach SEBI for guidance as and when it faces any issues in obtaining such a declaration or if it feels that rating announcement should be made without waiting for the declaration.

 

  1. Unaccepted Provisional Rating:
  2. In case the issuer (or sponsor, in case of REITs/InvITs), does not accept the provisional rating assigned, Acuité shall provide the following as supplementary disclosures along with "Unaccepted Ratings” published on its website:

    1. The details of the steps taken for assigning the provisional rating [as per G i)]. For instance, in case of REITs/ InvITs, such disclosure shall contain the broad details of the assets to be housed under the Trust, the proposed capital structure, etc.
    2. the rating referred to in Para G iii), viz. rating that would have been assigned in absence of the said steps/ documentation.

Annexure :

NOTE 1: There could be situations that a rating (either provisional or final) is assigned after duly evaluating the fundamental credit factors as well as the terms of the structure. However, it is experienced later that the structure failed to work in the manner that it was designed to. Example: The beneficiary failed to invoke the corporate guarantee in a timely manner or the lender failed to dip into the Debt Service Reserve Account (DSRA) on or before the due date, leading to missed payments. Such instances of failures in the working of the structure are not proposed to be covered under this approach. Acuité intends to continue with the existing practice of ‘downgrading’ the rating of the rated instrument/ facility in such cases. This is because these instances do not involve any change in the transaction terms.

NOTE 2: There could be other instances of changes in the rating factors that are beyond the control of the Acuité, but these are not proposed to be covered under this approach. As an example, there could be changes in the regulatory policies including changes in the import duty structure etc. which could change the rating of an entity. Acuité intends to continue with the existing practice of ‘upgrading/ downgrading’ the rating of the rated instrument/ facility in such cases. This is because these instances/ events, even though beyond the control of Acuité, are related to an assessment of the fundamental credit drivers of an entity.