Raters grapple with non-cooperation

In an indication of the worsening credit-worthiness of India Inc, the number of companies refusing to share information with credit rating agencies has increased sharply. The percentage of companies that fall into the ‘not-cooperating’ category has more than doubled from 22 per cent in FY18 to 47 per cent in FY20, according to Bloomberg. This implies that nearly half of the ratings being given by agencies are based on inadequate information.

In January, market regulator SEBI had directed credit rating agencies to downgrade an instrument to ‘non-investment grade with issuer-not-cooperating status’, if all outstanding ratings of the issuer remain ‘non-cooperative’ for more than six months. That is, from July 1, raters are supposed to downgrade issuers who have been non-coperative since January.

According to industry sources, rating agencies are in talks with regulators to withdraw ratings of corporate paper in cases where the companies do not provide sufficient information on their performance. The move, which comes against the backdrop of growing economic uncertainty, could impact ratings of at least half of the rated entities.

Anil Harish, Partner, DM Harish & Co, a law firm, noted that it is alarming for investors. “Mere withdrawal of rating against such companies is not a solution. Follow-up action against these companies should be strong. First, there has to be a common platform that informs the public about all such companies whose ratings have been cancelled or withdrawn due to inadequate info. SEBI or the government should think about the further course of action.”

An existential issue?

BusinessLine reached out to all the credit rating agencies but none offered a comment. Sources within the rating industry said that fear of losing access to funding seems to be prompting small and mid-sized companies to not co-operate when it comes to sharing information with the credit rating agencies.

“When financial health deteriorates, whatever little access to funding they have through banks and other institutions is lost because of the negative publicity they get on the ratings,” said a senior banker. Non-cooperation is to make sure that the downgrade information doesn’t reach the public at least for six months.

“For example, if a company is put in the ‘BB’ category, public sector banks will stop all funding. Companies see a rating downgrade as a nuisance, which can harm their existence in the current times of difficulty, plus there is an economic cost to it,” the banker added.

According to Bloomberg, in the case of Crisil, 47 per cent of the credit ratings fell into issuer-not-cooperating category as in March 2020 compared with 24 per cent as in March 2018. In the case of India Ratings, as many as 56 per cent of the credit ratings were in the issuer-not-cooperating category, up from 32 per cent in 2018.

“The problem of issuer not cooperating has been an issue in the last few years. Now, the current moratorium has impacted the credit profiles of many companies and the ratings they enjoyed before Covid may not hold true now,” said Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services.