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Guidelines for Enhanced Disclosures by Credit Rating Agencies (CRAs)

enture Trustees (DTs) registered with SEBI Dear Sir/ Madam, Sub: 1. In order to further strengthen the disclosures made by CRAs and enhance the rating standards, it has been decided to prescribe the following disclosures: I. Computation of Cumulative Default Rates (CDR) A. With a view to aligning the methodology of calculation of default rates with that followed globally and in partial modification of SEBI Circular CIR/MIRSD/CRA/6/2010 dated May 3, 2010, 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 For securities, the withdrawn rating shall be included in the computation of default rates till the completion of the cohort or the maturity of the instrument, whichever is earlier.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having rated the said debenture for the lifetime of the instrument, irrespective of the rating on that instrument being withdrawn.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 categor .....

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d. d. The same may be adjusted for rating withdrawals. For securities, the 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. e. Ratings of non-cooperative issuers shall be included in the cohort under the rating category in which the instrument is currently being rated. f. 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: i. For AAA: Zero for 1-year and 2-year default rate. Zero for 3-year default rate, with a tolerance level of 1%. ii. For AA: Zero for 1-year default rate. Zero for 2-year default rate with a tolerance level of 2%. iii. For A: Zero for 1-year default rate with a tolerance level of 3%. g. 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 .....

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ting symbols and definitions and specifying that this should not be construed as a change in the ratings. b. Disclosure of unsupported and supported ratings - To bring more transparency and to enable investors to understand the extent of credit enhancement provided by third party/ parent/ Group Company, disclosures of both the ratings i.e. unsupported ratings without factoring in the explicit credit enhancement and supported rating after factoring in the explicit credit enhancement shall be disclosed in the Press release. Further, the Press Release shall also contain a detailed explanation of all the covenants of the instrument. c. The CRAs shall devise a model to assess the adequacy of credit enhancement structure under various scenarios including stress scenarios. Such assessment shall also be disclosed in the press release regarding the rating action. V. Disclosure of rating sensitivities in press release A. The disclosure of factors to which the rating is sensitive, is critical for the end-users 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 secti .....

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Rating Category 1-Year Default Rate A1+ A1 A2 A3 A4 ANNEXURE A.3. - Short-run average default rates for long term instruments Rating Category 1-Year Default Rate 2-year Cumulative Default Rate 3-year Cumulative Default Rate AAA AA A BBB BB B C ANNEXURE A.4. - Short-run average default rates for short term instruments Rating Category 1-Year Default Rate A1+ A1 A2 A3 A4 ANNEXURE B Rating Symbols and Definitions for Long Term Credit Enhanced Instruments Long term Credit Enhancement instruments: The instruments with original maturity exceeding one year Rating symbols should have CRA s first name as prefix. AAA (CE) - Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. AA (CE) - Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. A (CE) - Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. BBB (CE) - Instruments with this rating .....

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d by strong accruals against negligible repayment obligations and liquid investments to the tune of Rs.xxx Crore. With a gearing of xx times as of March 31, xxxx, the issuer has sufficient gearing headroom, to raise additional debt for its capex. Its unutilized bank lines are more than adequate to meet its incremental working capital needs over the next one year. 2. Liquidity: Adequate - Adequate liquidity characterized by sufficient cushion in accruals vis-à-vis repayment obligations and moderate cash balance of Rs.xx Crore. Its capex requirements are modular and expected to be funded using debt of Rs.xx Crore for which it has sufficient headroom. Its bank limits are utilized to the extent of 80% and has sought enhancement in bank lines, supported by above unity current ratio. 3. Liquidity: Stretched - Liquidity is marked by tightly matched accruals to repayment obligations, highly utilized bank limits and modest cash balance. 4. Liquidity: Poor - Poor liquidity marked by lower accruals when compared to repayment obligations, fully utilized bank limits and modest cash balance. This could constrain the ability of the company to repay is debt obligations on a timely basis. - .....

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