Acuité adheres to the following definition of default#:
Instrument-wise definition of default
Financial Instrument |
Rating Scale |
Definition of Default |
Debentures/Bonds |
Long Term |
A delay of 1 day even of 1 rupee (of principal or interest) from the scheduled repayment date. |
Commercial Paper |
Short Term |
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Other Scenarios |
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When rated instrument is rescheduled: |
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Non-servicing of the debt (principal as well as interest) as per the existing repayment terms in anticipation of a favourable response from the creditor of accepting their restructuring application/ proposal shall 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. |
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
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:
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.
Any transient or temporary improvements in liquidity which are not expected to be sustained or fundamentally alter the liquidity profile - (for instance a one-time sale of a non-core asset to service a few instalments) - will not be considered as a reason for deviation from the curing period especially if Acuite is of the view that going forward the cash accruals from operations are expected to remain below the debt servicing commitments thereby leading to elevated possibility of default.
Further, in the following related scenarios of non-payment of debt (principal and/ or interest) (where it is established that there is adequate liquidity available with the issuer) may arise due to reasons that are operational or administrative in nature and beyond the control of the issuer, viz:
Even in the above situations, 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.
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? |
Further, Acuite will also be guided by SEBI Circular SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/ 160 dated August 31, 2020, with respect to "Relaxation from default recognition due to restructuring of debt”.