24th August 2020 (Version 2)
The increasing level of stressed assets in the balance sheets of Indian banks/financial institutions have been an area of concern for the bankers and regulator. The introduction of radical measures such as IBC (Insolvency & Bankruptcy Code) is expected to gradually result in an improvement in the credit culture and act as a deterrent to willful defaulters. While the intent of the regulation is to nudge the banks towards weeding out structurally unviable cases, it do allow flexibility to the banks to resolve such potentially viable cases in certain cases through resolution plans, wherever lenders expect that the revised debt servicing requirements (as per resolution plan) can be aligned to cash flows generated from the underlying assets.
The Reserve Bank of India vide its circular of February 12, 2018 had announced that resolution plans (RPs) involving restructuring / change in ownership in respect of accounts where the aggregate exposure of lenders is Rs. 100 Cr and above, shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. While accounts with aggregate exposure of Rs. 500 Cr and above shall require two such ICEs, others shall require one ICE. Only such RPs which receive a credit opinion of RP4 or higher for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation. Since the resolution plans pertain to distressed accounts, it entails a modification to the existing approach followed for regular Bank loan Ratings. Here the approach is reformative (futuristic) rather than punitive (focusing on past instances of delinquency). The RBI Circular of June 2019 made further modifications to the earlier circular of February 12, 2018 in terms of certain aspects of the Resolution plan such as timelines, specified period; however, the basic approach from a Rating Standpoint remains unchanged.
Acuité has developed a framework for RP ratings [also known as Independent Credit Evaluation (ICE)] to ensure a credible and consistent approach towards such cases. The RP rating methodology is based on an assessment of the following factors:
The Resolution plan typically entails splitting overall exposure as on a cutoff date into its sustainable and unsustainable components, and subsequently extending the maturity of the debt to align it with the operational cash flows. It is pertinent to note that Acuité will be rating only the Sustainable Portion of the exposure. The RP rating will not be applicable to the Unsustainable portion of the exposure. However, the commitments under all categories of debt (sustainable as well as unsustainable) will be reckoned while arriving at the debt service coverage indicators. Generally, the repayment of the unsustainable portion of debt (which could be in the debt instruments with equity like characteristics) is typically after the payment of sustainable debt. However, in certain cases, the payment of the unsustainable debt could also commence during the initial period of repayment. In such a case, the assumption is that the sustainable debt will have precedence over the unsustainable debt
ASSESSMENT OF REASONS FOR WEAKENING OF THE CREDIT PROFILE
In this case, Acuité shall primarily rely on the TEV report, Resolution Plan, and other related data furnished by the company in this regard along with discussions with management and bankers. Acuité may also call other documents such as Annual Report, Latest stock audit report, Forensic Audit Report, Monthly Operational data, to arrive at the final decision.
The brief parameters to be looked at are as follows:
ICE SYMBOL |
Definition |
RP1 |
Debt facilities/instruments with this symbol are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry lowest credit risk. |
RP2 |
Debt facilities/instruments with this symbol are considered to have high degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry very low credit risk. |
RP3 |
Debt facilities/instruments with this symbol are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry low credit risk. |
RP4 |
Debt facilities/instruments with this symbol are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry moderate credit risk. |
RP5 |
Debt facilities/instruments with this symbol are considered to have moderate risk of default regarding timely servicing of financial obligations. |
RP6 |
Debt facilities/instruments with this symbol are considered to have high risk of default regarding timely servicing of financial obligations. |
RP7 |
Debt facilities/instruments with this symbol are considered to have very high risk of default regarding timely servicing of financial obligations. |