SEBI directs rating agencies to disclose probability of default

Credit rating agencies will now have to disclose the probability of default for the instruments they rate and also clearly state the sensitive factors that could impact the credit worthiness of the entity.

Further, rating agencies will have to adopt a standardised terminology to disclose liquidity indicators like liquid investments, access to credit and cash flows among other factors while rating an instrument.

These are part of the enhanced disclosure guidelines introduced by the Securities and Exchange Board of India (SEBI) for credit rating agencies (CRA).

This assumes significance as the current calendar year has seen a record number of downgrades amidst a fall in the corresponding number of upgrades when compared to the previous calendar year.

“In order to enable investors to discern the performance of a CRA vis-à-vis a standardised PD (probability of default) benchmark scale, CRAs, in consultation with SEBI, shall prepare and disclose standardised and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run,” stated the SEBI circular.

Further, such uniform and standardised PD benchmarks will have to be disclosed on the website of each CRA on a consolidated basis for all financial instruments rated by a CRA by December 31.

Meanwhile, continuing its attempts to bring uniformity in terms of disclosures, the capital market watchdog has mandated standardised terminology — superior, strong, adequate, stretched and poor — to describe the liquidity indicators.

The regulator has also directed CRAs to devise a model to track sharp deviations in the bond spreads of debt instruments when compared to their benchmarks as such deviations have to be treated as a material event.

In terms of disclosure of factors to which rating is sensitive and have the potential to impact credit worthiness of the issuer, the CRA has been directed to have a specific section on ‘Rating Sensitivities’ in the press release which will explain the broad level of operating and financial performance levels that could trigger a rating change — upward or downward.

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Printable version | Jan 22, 2021 3:41:27 PM |

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