Guidelines for Enhanced Disclosures by Credit Rating Agencies (CRAs)
The default rates shall be computed in the following manner: a. CDR shall be calculated issuer-wise using the Marginal Default Rate (MDR) approach, using monthly static pools.b. The above may be adjusted for rating withdrawals. For securities, the withdrawn rating shall be included in the computation of default rates till the completion of the cohort or the maturity of the instrument, whichever is earlier. Accordingly, all DTs shall continue to report any delays/ default in payment on debentures to the CRA(s) having rated the said debenture for the lifetime of the instrument, irrespective of the rating on that instrument being withdrawn.c. Ratings of non-cooperative issuers shall be included in the cohort under the rating category in which the instrument is currently being rated.
Based on the above approach, a CRA shall disclose, on an annual basis, the average one-year, two-year and three-year cumulative default rates (based on weighted average) each for: a. Last 10-financial years period (Long-run average default rates) b. 24, 36 and 48 most recent cohorts, respectively (Short-run average default rates)
The historical data on the default rates disclosed every year shall be archived and made available on the website of each CRA for last 10 years.
Introducing Probability of Default (PD) benchmarks for CRAs
In order to enable investors to discern the performance of a CRA vis-à-vis a standardised PD benchmark scale, CRAs, in consultation with SEBI, shall prepare and disclose standardized 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.
The PD benchmark for the rating categories AAA, AA and A shall be as under, subject to any unexpected legal events/ mitigating circumstances impacting the default rates, with certain permitted tolerance levels:
For AAA: Zero for 1-year and 2-year default rate. Zero for 3-year default rate, with a tolerance level of 1%. For AA: Zero for 1-year default rate. Zero for 2-year default rate with a tolerance level of 2%. For A: Zero for 1-year default rate with a tolerance level of 3%.
For ratings on non-structured instruments, various instruments of an issuer with equal seniority level and having same rating shall not be included separately for default rate calculation. However, various instruments of an issuer having different seniority levels shall be included as separate instances, subject to a cap of three instances across all rating categories put together.
For ratings on structured instruments, various instruments, issued by a trust, with the same degree of seniority and hence having same rating shall not be included separately for default rate calculation. However, various instruments, issued by a trust, having different seniority levels shall be included as separate instances. Further, in order to avoid under-estimation of default rates in case of significantly higher number of tranches of differing seniority but same rating, a cap of three tranches per rating category per issuer may be applied.
The above standardised and uniform PD benchmarks shall be disclosed on the website of each CRA for ratings of long-term and short-term instruments, on a consolidated basis for all financial instruments rated by a CRA, by December 31, 2019.
Rating symbol for Instruments having explicit Credit Enhancement feature It had mandated certain disclosures and standardised the rating symbols in respect of rating of structured finance products, namely, instruments/ pay-outs resulting from securitization transactions, by using suffix ‘SO’.
CRAs shall now assign the suffix ‘CE’ (Credit Enhancement) to rating of instruments having explicit credit enhancement.
Disclosure of rating sensitivities in press release.
The disclosure of factors to which the rating is sensitive, is critical for the endusers to understand the factors that would have the potential to impact the credit worthiness of the entity. Accordingly, in order to improve transparency, the CRA shall have a specific section on ‘Rating Sensitivities’ in the Press Release which shall explain the broad level of operating and/ or financial performance levels that could trigger a rating change, upward and downward. Such factors shall be disclosed in quantitative terms to the extent possible, discernible to the investors, and should not read like a general risk factor.
Disclosure on liquidity indicators.
It had mandated inclusion of a specific section on Liquidity in the Press Release, highlighting parameters such as liquid investments, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc.
In order to make the disclosures meaningful to the end users, it has been decided to mandate disclosure of liquidity indicators using standardised terminology. Accordingly, CRAs shall, in addition to the disclosures mandated vide aforesaid circular, shall also disclose the liquidity indictors using one of the following indicators and give an explanation thereon: a. Superior / Strong b. Adequate c. Stretched d. Poor
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