Companies with good domestic ratings may not always be subject to a reduction in investment grade when rated by foreign agencies. Therefore, bankers want to know whether the central bank’s reference to rating eligibility to benefit from the latest plans applies to the domestic or even overseas context.
A top-rated company in the world can price bonds or loans with a spread of around 100 to 200 basis points depending on its brand, dealers said. However, a company rated high yield by foreign rating agencies must offer much more to attract global banks/investors. One basis point is 0.01 percentage point.
“The latest easing makes sense, especially for companies rated in the high-yield category by global ratings firms,” one of the people quoted above told ET.
On Wednesday, the Reserve Bank of India (RBI) doubled the borrowing limit for a local business to $1.5 billion through the External Commercial Borrowing Facility (ECB) under the automatic route.
“The overall cost cap under the ECB framework is also raised by 100 basis points, subject to the borrower being investment grade,” the RBI said last week.
This threshold is currently capped at 500 basis points. The relaxed rules will only be in effect until December 31.
The foreign banks individually approached the RBI, which did not comment on the matter.
“For the same rating, the probability of default for any local rating is higher than global ratings,” said K Ravichandran, Chief Rating Officer,
Ratings. “This has ramifications for a local business raising funds globally. The borrower will get an offshore rating much lower than their onshore rating because the former is also influenced by the country’s sovereign rating.”
A company rated triple A by ICRA will likely be rated BBB- or Baa3 by Moody’s Investors Service, an international rating company.
Moody’s rates about 76 Indian borrowers of which only 31 companies fall under investment grade (IG).
In the international market, a local company’s rating is usually capped at India’s sovereign rating rank, which is BBB-, the lowest IG rank.
There are a few exceptions. A local company can be rated one or two notches above the sovereign rating provided that the majority of its profits are in dollars. This applies to certain sectors, including information technology and oil and gas.
With the exception of triple AAA rated Indian companies, other IG category rankings generally do not find the same ranking when rated by international rating companies. Entities rated between AA and A would find their place in the High Yield category while the others will struggle to find even an acceptable rating to raise funds abroad.