MUMBAI: Since June 2019 when Sebi had issued a wider set of disclosure norms for external credit rating agencies (ECRAs), new rating assignments in investment grades instruments have improved from 25.3 percent in FY19 to 60 per cent in January 2022, reflecting the improved corporate health in investment category, says a report.
The same had only a low 0.76 per cent of the rating universe being in the AAA-rated category, while 3.13 per cent are AA as of February 2022, shows an analysis by SBI Research.
Similarly, within the universe of bond primary issuances, the share of AAA-rated bonds has declined from around 75 per cent in the past two years to around 68 per cent in FY22, says the report, which opines that this is a good omen as it clearly reflects some early conservative approach in bond rating specially in the AAA category.
Again, rating outstanding numbers from all ECRAs suggest that only 25 per cent of all the rating are over investment grade--BBB and above and rest 75 per cent are below investment grade.
The report also feels that going forward, with an improvement in credit rating during the pandemic years, it will be interesting to look at the transition of AAA-rated corporates in terms of benchmarked probability of default (PD).
The current geopolitical conflict may also act as an important factor in influencing credit profile in future, says the report pencilled in by Soumaykanti Ghosh, the chief economic advisor at the State Bank Group.
Ghosh also feels that the improvements have been on the back of the continued improvement in corporate balance-sheets and aggressive provisioning by banks, ensuring that banks are ready to fund the next phase of growth cycle.
Ideally, banks may also look at re-defining its risk appetite framework with the corporate balance sheets now looking more squawky. Such risk appetite framework may enable a balanced growth of the credit book to meet organization strategic goals and to meet larger objectives of kick starting growth keeping in mind the risk tolerance positions, notes the report.
Markets watchdog Sebi has subsequently advised ECRAs to disclose a matrix on the probability of default for various rated instruments both for short-run and long-run with a view to bringing in comparability of ratings across issuers, and also to introduce an element of conservatism in rating agencies assigning higher ratings to corporates.
The result is that three years later, the cumulative default rate (CDR) reveals that long term long run CDR (over 10 years) of ECRA for one, two and three years largely confirms to the benchmarked PD primarily for rating agencies Crisil and Icra across all rating domains, says the report.
Of course there were a couple of defaults because of the unexpected legal events that introduced a minor upward bias in CDRs for ECRAs. Otherwise, the numbers largely confirm to the benchmark PD that has been mandated by Sebi.
The long-term short run CDRs, however, reveals that the convergence to PD is still an ongoing process. However, the long-term short run (over shorter time periods) CDRs are not strikingly different from the benchmark PD at least for Crisil and to a some extent Icra, concludes the report.
