Criteria For Default Recognition
13th July 2020 (Version 6)


Acuité adheres to the following definition of default#:

Fund-based facilities & Facilities with pre-defined repayment schedule

Facilities Rating Scale Proposed Definition of Default
Term Loan Long Term A delay of 1 day even of 1 rupee (of principal or interest) from the scheduled repayment date.

 

Working Capital Term Loan
Working Capital Demand Loan (WCDL)
Debentures/Bonds
Certificate of Deposits (CD)/ Fixed Deposits (FD) Short Term/ Long term
Commercial Paper Short term
Packing Credit (pre-shipment credit) Short Term Overdue/unpaid for more than 30 days.
Buyer's Credit Short Term Continuously overdrawn for more than 30 days
Bill Purchase/Bill discounting/Foreign bill discounting /Negotiation (BP/BD/FBP/FBDN) Short Term Overdue/unpaid for more than 30 days

Fund-based facilities & No Pre-Defined Repayment Schedule

Facilities Rating Scale Proposed Definition of Default
Cash Credit Long Term Continuously overdrawn for more than 30 days.
Overdraft Short Term Continuously overdrawn for more than 30 days.

Non fund-based facilities

 

Facilities Rating Scale Proposed Definition of Default
Letter of credit (LC) Short Term Overdue for more than 30 days from the day of devolvement.
Bank Guarantee (BG)(Performance / Financial) Short Term Amount remaining unpaid from 30 days from invocation of the facility.

 

Other Scenario

Scenario Proposed Definition of Default
When rated instrument is rescheduled: Non-servicing of the debt (principal as well as interest) as per the existing repayment terms in anticipation of a favorable response from the banks of accepting their restructuring application/ proposal should be considered as a default.
Rescheduling of the debt instrument by the lenders prior to the due date of payment will not be treated as default, unless the same is done to avoid default or bankruptcy.

Events of Default in case of Hybrid Instruments 

Acuité believes that any delay in servicing the interest from the scheduled repayment date shall constitute an event of default. Acuité will recognize a default when the issuer of the instrument delays, even by one day, any interest payment (and/or principal in case of non-perpetual instruments) even if the terms of the instrument allow such delays in certain situations.

Curing Period

The following curing period shall be applicable for entities rated 'D' i.e. 'Default' category

  • *Generally 90 Days - from 'Default' up to 'BB+'
  • Generally 365 Days - from 'Default' to 'BBB-' and above

However, there could be situations where an entity that has defaulted in the past, witnesses one or more (list is indicative, not exhaustive) of the following:

  • Change in management
  • Acquisition by another firm
  • Sizeable inflow of long term funds
  • Benefits arising out of regulatory changes
  • Sharp improvement in liquidity brought about by debt restructuring
  • Technical defaults

The aforementioned or similar such developments may structurally alter the credit risk profile of entities that have defaulted in the past. If Acuité is of the opinion that factor(s) that led to a default earlier is unlikely to recur in the near term, Acuité may deviate from the curing period stated above.

*Cases of deviations from stipulated  90  days,  if  any,  shall  be placed  before  the  Ratings  Sub-Committee of the board of the CRA, on a half yearly basis, along with the rationale for such deviation. This is in line with SEBI circular, "Review of Post-Default Curing Period for CRAs” (SEBI/ HO/MIRSD/ CRADT/ CIR/ P/ 2020/ 87) dated May 21, 2020.

Checklist for the Rating Note

The Rating Analyst should ensure that the points mentioned in the checklist below are applicable to all the outstanding instruments. The table below should form part of every rating note.

Details of the checklist Yes / No
Has the issuer indicated that they have delayed or defaulted^ in debt service on any external debt (i.e. excluding debt from the promoters)?
Has the company's auditor (typically in the annual report) indicated any delays/ defaults in debt service by the borrower?
As part of the interactions with the borrower's bankers, have any of the bankers indicated any irregularity/ delays/ defaults in debt service by the borrower?
For capital market instruments, have the debenture trustees indicated any delays/ defaults in servicing of the debt instruments by the issuer?

 

# With respect to recognition of default, Acuite will be guided by SEBI Circular SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/ 53 dated March 30, 2020.
A note on the same is available on: https://www.acuite.in/transitory-relaxation-from-compliance-with-certain-provisions-under-SEBI.htm

 

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