With India’s sovereign rating in the BBB category serving as a ceiling, the ratings on nearly 32,500 Indian companies — including ‘AAA’ and ‘AA’ companies — will be boxed on a far narrow bound between ‘BBB’ category and ‘D’ on the global scale, rating agency Crisil has said.
In other words, while as much 85-90 per cent of the bond issuances in India are by ‘AAA’ and ‘AA’ rated companies, if they are assessed on the global scale, their ratings would be rated below the ‘BBB’ category. In India, ‘AAA’ rated companies have defaulted, the latest example being IL&FS which was rated ‘AAA’ by rating agencies.
“Comparing the 276 ‘AAA’ ratings that Indian credit rating agencies (CRAs) have assigned with nine by S&P Global Ratings or 53 by Moody’s is erroneous, and would tantamount to equating differing scales such as Celsius and Fahrenheit,” Crisil said. “By construct, credit ratings can have — and do have — different scales. That’s because they are relative assessments of credit risk. And the relative benchmarking can be national, global or regional.” According to Crisil, investors in developed economies such as the US and Europe consider investment options across the world. Credit risk assessments that benchmark issuers across the world on a global scale (‘AAA’ to ‘D’) offer comparable information to them and enables their investment decisions.
On the other hand, a national rating scale affords granular benchmarking of domestic issuers on a 20-point scale (‘AAA’ to ‘D’) and the sovereign, which has the flexibility to print local currency, is pegged at ‘AAA’ on this scale. “This provides valuable information to investors in local currency domestic debt such as insurers, pension funds, banks and mutual funds,” it said.
Further, ‘AAAs’ in India make up for only 0.85 per cent of the overall rated universe, which is far lower than corresponding metrics across other national scale ratings in China, Taiwan, Thailand and South Korea. To be sure, there has been a steady decline in the number of ‘AAA’ rated companies globally. At S&P Global Ratings, it reduced from 89 a decade back to 9 as of January 1, 2018. For Moody’s, it went from 170 to 53. The high cost of maintaining AAA ratings has contributed to this. “For an entity to be rated ‘AAA’ on the global scale, it has to enjoy an extraordinarily strong balance sheet that can withstand stresses on a world scale, and manoeuvre complex international business environments,” it said.
That puts severe limits on debt levels and gearing headroom for growth. Says Gurpreet Chhatwal, president, CRISIL Ratings, “Over the past decade or more, companies in the developed economies have relied more on debt in their quest to increase shareholder value. When reliance on debt increases, financial risk also rises leading to a lowering of credit ratings. The width and depth of the corporate bond markets in these geographies, and ultra-low borrowing costs over the past decade, have also encouraged the shift to debt-driven growth.”
Not surprisingly, ‘AAA’ rated firms accounted for less than 5 per cent of bond issuances in the US in 2017, ‘A’ and ‘BBB’ accounted for over 60 per cent, and speculative grade around 20 per cent. Pertinently, India and other emerging markets do not have a deep and wide corporate bond market. Beyond these categories, the financial flexibility to tap capital market instruments drops drastically. “That’s why in India, there is a strong incentive for companies to maintain better credit profiles at the top end of the rating spectrum on the national scale,” it said.