• No downgrading in case of loan default: Operational infrastructure projects may get ratings shield

    Infrastructure projects that have started commercial operations will not be downgraded to junk ratings if their promoters temporarily default on loan payments, ensuring that the supply of funds does not dry up for developers facing constraints.

    For this, the government will soon come out with a new ratings methodology that will factor in expected loss and the ratings of such infrastructure projects will only suffer to a limited extent.

    A senior government official confirmed the development and said that their idea was to prevent the ‘one-day-one rupee’ delay for default recognition that causes lasting damage to a project.

    “In this scenario, the ratings of the company plummet and it further finds it difficult to service the debt. The idea is to assess the ratings depending upon the project’s viability,” the official said, not wanting to be identified.

    Finance minister Arun Jaitley in his 2016-17 budget speech had announced that the government was looking to work out a new credit rating system for infrastructure projects that will give “emphasis to various in-built credit enhancement structures” and not rely upon “a standard perception of risk which often result in mispriced loans”.

    The government official quoted above said that the new rating system would ensure that “if ratings of such a project is marginally impacted, other long-term investors such as insurance and pension funds will still be able to participate in their public issuances”.
    The official said discussions were on with all regulators including capital market watchdog Securities and Exchange Board of India on the new rating system. Initially, this benefit will only be extended to companies whose projects have achieved commercial operations.

    “All this will depend on the current and expected cash flow of the project,” said another official aware of the deliberations.

    “Today, if a company defaults for a day, its account becomes a non-performing asset and it becomes difficult for promoters to salvage it. Such ratings will give them the recourse to approach other financial institutions,” the official said.

    But all regulators are not convinced. “The viability of these projects will depend upon assumptions that some of them may be beyond the promoter’s control.

    There needs to a benchmark list on what conditions these projects should fulfil before a new improved rating is assigned to them,” said a senior official from a pension regulator.

    A senior official with Insurance Regulatory and Development Authority of India (IRDAI) said that it is a better idea to start with projects that have achieved commercial operation declaration.

    “Since most of the risks occur before implementation, in such projects those causes can be identified and if there is a way out, then only ratings can be assigned,” he said.  Vince Carter Jersey

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