CRISIL's Approach to Covid-19-Related Restructuring

CRISIL’s approach to Covid-19-related restructuring

September 2020

Criteria contacts

Somasekhar Vemuri Ramesh Karunakaran Senior Director Director Rating Criteria and Product Development Rating Criteria and Product Development CRISIL Ratings CRISIL Ratings [email protected] [email protected]

Chaitali Nehulkar Wazeem A Associate Director Manager Rating Criteria and Product Development Rating Criteria and Product Development CRISIL Ratings CRISIL Ratings [email protected] [email protected]

Default recognition following the RBI resolution framework

The Reserve Bank of India (RBI) notified a resolution framework through its circular dated August 6, 2020, to support corporates facing stress because of the Covid-19 pandemic. According to this, borrower accounts under stress solely due to the pandemic that are classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020, shall be eligible for resolution.

Following the RBI notification, the Securities and Exchange Board of India (SEBI) allowed credit rating agencies (CRAs) to relax default recognition norms through its circular dated August 31, 2020. As per the circular, if the CRA is of the view that the restructuring by lenders1/investors is solely due to pandemic-related stress or under the RBI resolution framework, the same may not be considered as a default event by the CRA.

In light of these regulatory developments, CRISIL has appropriately factored in pandemic-related stress and the RBI resolution framework in its default recognition framework. This document highlights CRISIL’s approach to default recognition for all debt instruments of entities applying for debt restructuring due to pandemic-related stress.

Approach to default recognition in case of restructuring due to pandemic stress With RBI enabling one-time restructuring for pandemic-affected entities, CRISIL expects some of its rated entities to avail this benefit. Typically lenders, including bankers and other investors, may take time to process the restructuring application. Hence, procedural delays cannot be ruled out.

Therefore, CRISIL may not recognise default as per the original repayment schedule if the lenders approve or are expected to approve the entity’s application for restructuring. The application for restructuring, however, needs to be made before the due date. This approach in terms of default recognition will continue till the final restructuring plan is approved by the lenders.

While CRISIL may not recognise default owing to pandemic-related restructuring, there may be appropriate rating actions, including placing ratings on watch, to reflect the change in credit profile, if any. The broad framework that CRISIL will adopt in terms of default recognition under different scenarios is outlined in the table below.

1 Please note that the word ‘lenders’ is used generically and includes banks, NBFCs, financial institutions, and other investors, as the case may be.

Default recognition of rated debt instruments under different scenarios

Payment status on rated debt Scenario Lender’s / investor’s view / approval CRISIL’s default recognition instruments

 Missed payment as per the  No application for restructuring  Missed payment recognised as 1 original schedule before received by lender default application for restructuring  Missed payment recognised as 2  Lender has rejected the proposal default2

 Appropriate rating action,  Missed payment as per the 3  Lender is undecided including possibility of downgrade original schedule after to default application for restructuring  Missed payment not considered 4  Lender has approved the application as default ●

As the situation is fast evolving, CRISIL may deviate from the above framework based on case-specific nuances.

Once a resolution plan (RP) is implemented, the revised repayment schedule as per the RP will be considered by CRISIL for default recognition. CRISIL will also review its ratings once the RP is finalised to gauge the impact of the RP on the credit profile of the rated debt instruments.

2 Once the lenders reject the restructuring application, the borrower will need to regularise any overdue amounts. As these amounts could be sizeable, CRISIL will consider default if the borrower is unable to regularise the overdue amounts within a reasonable grace period.

About CRISIL Limited CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better. It is India’s foremost provider of ratings, data, research, analytics and solutions, with a strong track record of growth, culture of innovation and global footprint. It has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers. It is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

About CRISIL Ratings CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

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