The size of the local bond market is just 16 per cent of the GDP; it is 120 per cent in the US. The incentives for a US company (or any global one) to strive for a triple-A rating is simply not there. “Because, even a lower rating affords access to funds at finer costs, it lends strategic flexibility to improve shareholder returns. Triple-A rated firms contributed less than 5 per cent of bond issuances, while single-A and triple-B ones accounted for more than 60 per cent, and speculative grade firms around 20 per cent,” says Chatwal.
Trouble ahead for India Inc
The Securities and Exchange Board of India (Sebi) wants borrowers to tap the bond mart for a quarter of their fresh long-term funding of over Rs 100 crore from April 1. All this, even as the Standing Committee on Finance on ‘Strengthening the credit rating framework in the country’ headed by Veerappa Moily has made it clear that CRAs will need to get their act right.
Says Jayesh H, founding partner, Juris Corp: “Excessive competition amongst intermediaries has resulted in not-so-good practices. When so many are driven by year-end bonuses, it will only accentuate the race to the bottom of quality. Then what? Have the clawback for bonuses applied to all intermediaries; why only stop at bankers!”
Leena Chacko, partner at Cyril Amarchand Mangaldas, says: “While the corporate bond markets
continue to develop, setting out minimum standards and qualitative variables in the rating process, and ensuring full disclosures of details of the rating methodology could be considered as better reinforcements.” But that still doesn’t answer the issue — the need to secure top ratings to get into the high-end resort, which the local bond mart is increasingly turning into.
These rated instruments include fund- and non-fund based bank loan facilities, debentures, commercial paper and certificate of deposit, and amounts to $1.5 trillion.
The other problem in the Indian context is the sovereign rating of ‘BBB’ — investors keen on an exposure to issuers here are hampered by it. “It is unlikely that a company generating all its cash flows from India will have an triple-A or double-A rating global rating scale,” explains Chatwal. To that extent, ratings of Indian companies will have to be boxed inside the triple-B to ‘D’ categories on the global scale.
The Insolvency and Bankruptcy Code, 2016 (IBC) envisages time-bound resolution of corporate defaults (much on the lines of Chapter 11 filing in the US) and provides a forum to capital market participants for resolution of disputes relating to corporate bankruptcies.
“While IBC does not minimise the likelihood of corporate defaults, it does provide a resolution roadmap for addressing such events. This is a positive development and is expected to widen the market for bonds lower-rated companies”.
It is felt that external credit enhancements to bond issuances may go up, given the pressure to secure good ratings, going ahead.
However, as on date, there is little by way of data on “propped-up” offerings via this route, or how they were structured.
In any case, it will push up the pricing if credit enhancements are sought.
Incidentally, in China, the commune of rated companies is only 3,959 because of the lack of bank loan-ratings market; our portfolio at 35,000-plus covers the capital markets
and bank loans even though it primarily includes issuers triple-A, but without external credit enhancements.
“Sebi’s framework is a critical supply-side initiative, but it needs to be matched by commensurate demand side reforms,” says B Prasanna, group executive and head (global markets group) at ICICI Bank. This is further complicated by another set of norms that will kick in from the next fiscal year — banks’ exposure to a single entity and a group is to be capped “at no more than 20 per cent and 25 per cent of tier-1 capital from current levels of 15 per cent and 40 per cent”, starting the next fiscal year.
If banks are to back bonds with or without credit enhancements, this (exposure caps) is another element which needs to be borne in mind.
For now, the bond ratings mart is in a bind.