Deep dive into credit ratings

Rating reports now offer a wealth of information for investors to spot corporate distress

Whether you’re an investor in stocks, bonds or debt mutual funds, early warning of financial distress is critical to help you bail quickly out of a bad investment. But retail investors are often the last to know about a company’s financial woes. Rating agencies have for long been criticised for being too slow in their reactions to adverse events. But SEBI has come up with host of new rules in the past year that require them to take prompt note and make quick assessments of their impact. Here are four useful resources for both bond and stock investors.

On the watchlist

Earlier, rating agencies used to put companies under a ‘rating watch’ only after well-publicised corporate actions such as mergers, hive-offs or losses were set to materially change their financials. But from this June, SEBI has asked rating agencies to keep a close watch on the material events that companies disclose to the stock exchanges. Apart from this, SEBI also expects rating agencies to seek an explanation from the company and put out a rating review within seven working days for any severe and unexplained decline in stock price.

The above instruction has prompted all the rating agencies to respond more quickly to news flow relating to companies. Where they haven’t issued a downgrade, they have placed the firm on rating watch. Looking through such watchlists put out by rating agencies on their websites, can help investors obtain more details on speculative news reports.

The stock of Religare Enterprises has nosedived over 70 per cent from ₹170 in end-June to ₹43 in end-September on a string of bad news.

In early July, reports surfaced of auditors flagging irregularities in the loan book of its subsidiary Religare Finvest. This was followed by the lenders to Religare Enterprises invoking a promoter pledge and a postponed deal to sell the insurance business.

However, investors who kept an eye out for rating watch reports could have gone into damage-control mode in July itself and cushioned themselves from the steep stock price decline. On July 12, citing negative observations by auditors, CARE downgraded the Religare Finvest NCD from AA minus to A, and placed it on rating watch. On July 21, India Ratings downgraded Religare Enterprises too.

Not cooperating

Investors in debt mutual funds have received nasty shocks owing to the sudden suspension of ratings by rating agencies citing the lack of disclosures from the issuer. It was such suspension in Amtek Auto’s bond ratings that precipitated a crisis at JP Morgan AMC’s debt schemes in 2015.

However, after that episode, SEBI has barred rating agencies from suspending their ratings where the issuer company is unwilling to co-operate.

They are now required to continue to rate their securities with the disclaimer that the issuer is ‘non-cooperating’. Rating agencies can also label companies as ‘non-cooperating’ if they fail to provide clarifications on material events or disclose debt defaults to them in time.

In some cases, companies with doubtful financials haggle with the rating agency or jump ship if they are not happy with the ratings assigned.

Rating agencies are now required to disclose this as ‘Ratings assigned and not accepted’. ICRA has put out up a list of 201 companies on its website that haven’t ‘accepted’ its ratings, including familiar names such as Fortis Healthcare Holdings, Shilpi Cable Technologies and Satin Creditcare Network.

So, if you see the tag ‘non-cooperating’ or ‘not accepted’ on credit ratings, it’s a sign of brewing trouble.

No default statement

Retail investors in bonds or debt schemes often remain in the dark about a delay or even default in the payment of dues by a company they’ve invested in. Much before the news reaches them, the markets have responded to the rumour mills. But a new disclosure rule may give you an early warning.

In June, SEBI asked all credit rating agencies to seek a ‘no-default statement’ from all the companies under their coverage at the end of each month, confirming that they had not defaulted or delayed on any interest or principal repayments. In case of default, the rating agency should conduct a prompt rating review within two days. Such reviews are to be made public.

Rating agencies have started putting up the list of companies which have not provided the mandatory ‘no default’ statement under the ‘Regulatory Disclosures’ section on their sites.

Rating rationales

Not long ago, the rating rationales provided by the credit rating agencies used to be loaded with legalese. But new disclosure requirements have added a wealth of information. For instance, Rating History allows the investor to understand whether the company’s financial metrics have gone uphill or downhill in the last three years.

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