AAA ratings assigned by domestic, global raters different, says CRISIL

According to CRISIL, if Indian companies were to be assessed on a global scale, their ratings will be in the range of BBB and D

The ‘AAA’ ratings assigned by domestic credit rating agencies and global ones cannot be compared, as ratings assigned to companies are relative assessments of credit risks and the benchmarks could be national, global or regional, said CRISIL.

Indian rating agencies have assigned ‘AAA’ rating to 276 companies, while global ones like S&P and Moody’s gave ‘AAA’ rating to only nine and 53 companies, respectively.

In case of India, the ‘AAA’ rated firms make up only 0.85 per cent of the total rated companies, which is lower than corresponding metrics across other national scale ratings in countries such as China, Taiwan, Thailand and South Korea.

According to CRISIL, if Indian companies were to be assessed on a global scale, their ratings will be in the range of BBB and D, because India’s sovereign rating will act as the ceiling given India is rated in the BBB category.

On the other hand, if Indian companies are rated in a domestic rating scale, it affords granular bench-marking of domestic issuers and the sovereign. Moreover, as the sovereign has the power to print currency, it is assigned a AAA rating.

Further, it has been noted there has been a decline in the number of AAA rated companies globally. “At S&P Global Ratings, it reduced from 89 a decade back to nine as of January 1, 2018. For Moody’s, it went from 170 to 53”, said CRISIL. The reason behind this is the high cost of maintaining AAA ratings.

For a firm to get AAA rating, the balance sheet has to endure stress on a world scale and steer through complex international business environment. In developed economies, firms have relied more on debt to increase their shareholder value and this has led to lower ratings as reliance on debt increases financial risks.

According to Gurpreet Chhatwal, President of CRISIL 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.”

Hence, the companies assigned AAA rating in the US accounted for less than 5 per cent of bond issuances in 2017, while A and BBB accounted for over 60 per cent, and speculative grade around 20 per cent.

However, as India and other emerging market economies do not have a wide corporate bond market, hence large investors, including insurers and pension funds, can put money only in highly rated paper. This has resulted in 85-90 per cent bond issuances in India being done by firms that are AAA or AA rated.

“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”, said CRISIL.