Such support from the parent company or promoters allows companies to reduce the cost of borrowing – the higher the rating, the lower the interest charges on the debt.
Even for seemingly more enforceable support such as corporate guarantees (as opposed to the comfort letter), RBI said such structures can only be used to improve the rating if there is a strict time limit for the invocation of the guarantee by the lenders.
“RBI’s instructions relate to bank loan ratings,” said a senior banker. “But under existing Sebi guidance, all of these media can be used to raise the rating of non-convertible debentures as long as the stand-alone (unsupported) rating is concurrently disclosed.”
Several structures listed in the guidelines
“But thanks to RBI guidance, there would be situations where the same issuer would have a higher rating for non-convertible debentures (NCDs) and a lower rating for loans,” the senior banker said. “So RBI and Sebi should sort this out to avoid confusion in the market.”
RBI’s April 22 guidance note to rating agencies also prevents them from drawing comfort from debtor-co-debtor structures. These are common infrastructure company arrangements where multiple special purpose vehicles (SPVs) – housing separate projects – pool their cash flows to create a mechanism in which funds from an SPV can be used. to repay the debt if another vehicle facing a cash flow crisis has difficulty repaying the loan.
“Although such structures have become popular in infra and sectors like renewable energy, they are still not tested for delinquency. So RBI is probably skeptical because it does not know how it would work in the event of a fault, in especially if more than one SPV has problems and the total cash flow is insufficient,” an industry official said.
Many structured loans have upgraded ratings due to shares pledged by sponsors with at least a 2x hedge, i.e. the value of the pledged shares is twice the amount loaned. Along with this there is an arrangement where more shares have to be added if there is a decline in the share price and the hedge reduces to 1.5x.
“But there were instances where the promoters were unable to replenish the hedge and top up the stocks. Even mutual funds had invested in such instruments, backed by shares from the promoters. RBI’s concern may stem from such experiences and volatility in stock prices,” one analyst said.
Another question arises. Even if rating agencies use these media (on which RBI has put question marks) to give higher ratings to MNTs (whose market is regulated by Sebi), will banks (regulated by RBI) invest in such debt instruments?
While the RBI Directive approved the use of corporate guarantees for “credit enhancement” (CE) – the jargon of rating enhancement – it established that banks must formally agree on a time frame in which they would invoke a guarantee following a default in payment, while the guarantor company must commit to a payment period once the invocation by the lenders has been made.