Capital markets regulator SEBI on Monday came out with new guidelines to standardize the use of rating scales used by credit rating agencies (CRAs). The issuer rating or corporate credit rating indicates the degree of safety of the issuer or rated entity with respect to the timely servicing of all its debt obligations.
After consultation with the CRA, standardized symbols and their definitions have been prepared for issuer rating or corporate credit rating, the Securities and Exchange Board of India (SEBI) said in a circular, adding that the new guidelines will come into effect from January. Will be 1, 2023.
According to SEBI, ‘Rating Outlook’ indicates CRA’s outlook on the expected direction of rating movement in the near to medium term, while ‘Rating Watch’ indicates CRA’s outlook on the expected direction of rating movement in the short term. The CRA must specify a rating outlook and disclose it in the press release. Also, the regulator has specified standard descriptors for rating clocks and rating outlook.
A positive impact rating watch, a developing impact rating watch, and a negative impact rating watch are the three standard descriptors used to place an issuer security on a rating watch. In addition, stable, positive and negative are standard descriptors that are used when an issuer or security is placed on a rating outlook. Also, SEBI said that the rating symbols should have the first name of CRA as a prefix.
Under this, issuers with ‘AAA’ rating symbols are considered to have the highest level of security with respect to timely servicing of debt obligations. Credit risks for such issuers carry the lowest credit risk. Whereas issuers with ‘AA’ and ‘A’ rating symbols have high and adequate security respectively with respect to timely repayment of debt obligations. The credit risks for such issuers carry very little credit risk.
As per SEBI, issuers with BBB rating are considered to have medium level of security with respect to timely servicing of debt obligations. The credit exposure of such issuers carries moderate credit risk. Those with BB, B and C ratings are considered to have ‘moderate’, ‘high’, ‘very high’ risk of default related to timely servicing of debt obligations respectively and issuers with D ratings are or are expected to be in default Soon by default.
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