SEBI has issued rules that credit rating agencies (CRAs) should follow to standardise the use of rating scales by them. CRAs analyse and rate financial instruments, mainly on the debt side, and suggest the risks involved based on the ratings they accord to the instruments. But the ratings are often filled with jargon and complicated for a common person to understand.
According to SEBI, ‘rating outlook’ indicates CRA’s view on the expected direction of the rating movement in the near to medium term, whereas a ‘rating watch’ indicates a CRA’s view on the expected direction of the rating movement in the short term. CRA will have to assign a rating outlook and disclose the same in the press release. Also, the regulator has specified standard descriptors for rating watch and rating outlook.
Rating watch with positive implications, developing implications and negative implications are the three standard descriptors that should be used when an issuer security is placed on rating watch, SEBI said to make it less complicated. Further, stable, positive and negative are the standard descriptors to be used when an issuer or security is placed on rating outlook, SEBI said. The new rules will be effective from January.
Symbols and credit risk
Also, SEBI said that rating symbols should have CRA’s first name as prefix. Under this, issuers with ‘AAA’ rating symbols are considered to have the highest degree of safety regarding timely servicing of debt obligations. Debt exposures to such issuers carry lowest credit risk.
While issuers with ‘AA’ and ‘A’ rating symbols are understood to have high and adequate degree of safety, respectively with regard to timely servicing of debt obligations. Debt exposures to such issuers carry very low to low credit risk.
As per SEBI, issuers with BBB rating are considered to have moderate degree of safety regarding timely servicing of debt obligations. Debt exposures to such issuers carry moderate credit risk.
Those with BB, B and C ratings are considered to have ‘moderate’, ‘high’, ‘very high’ risk of default, respectively pertaining to timely servicing of debt obligations and issuers with D rating are in default or are expected to be in default soon.