Default Recognition & Post default curing period policy

Preamble

Brickwork Ratings (BWR) emphasizes the timely default recognition for rated debt instruments and bank loans as a critical component of its rating process. This policy is updated periodically to align with the regulatory guidelines issued by the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI).

Scope of the Criteria

This policy applies to all rated financial instruments, including, but not limited to capital market instruments, long-term and short-term debt, bank loan facilities, fixed deposits, issuer ratings and structured finance instruments.

Default Recognition Policy

1. Instruments or facilities that have a pre-defined repayment schedule

   Default occurs in the first instance of a missed payment on a rated instrument. A delay of a single day or a shortfall of even a single rupee constitutes default. Non-payment of financial obligations on both principal and interest, on the due date, or per specified contractual terms results in a rating downgrade to “BWR D”, upon verification.

2. Instruments or facilities without a pre-defined repayment schedule

   For instruments or facilities without a pre-defined repayment schedule, such as cash credits, packing credit, overdrafts, and letters of credit, etc., default is recognized if the facility remains continuously overdrawn or overdue for more than 30 days. (Refer to Annexure 1 for instrument-specific definitions).

3. Instruments or facilities with a permitted grace period

   When sanctioned terms permit a grace period for debt servicing, the payment date shifts accordingly. Lenders or investors must document this grace period in the sanction letter, loan agreement, or prior written communication. Missing a payment beyond the allowed grace period constitutes a default.

4. Instruments or facilities backed by a third-party guarantee

   Default recognition aligns with the structured payment mechanism specified in the guaranteed document. In case of structured payment mechanisms with a ‘T-’ structure (where ‘T’ is the due date and payment is required prior to ‘T’), non-adherence to the mechanism resulting in a missed payment on the due date constitutes a default. In case of ‘T+x’ structures, default is recognized if payment is not made by the ‘T+x’th day. In cases where no structured payment mechanism is defined, a missed payment on the underlying facility on the due date constitutes a default, regardless of whether the guarantee has been invoked.

5. Hybrid instruments

   Any missed or deferred payment on a hybrid instrument constitutes as default, even if the instrument’s permit such deferrals.

6. Factoring in past defaults

   If past payment delays that were not previously recognized are identified, a downgrade to "BWR D" occurs immediately to reflect the default. If the issuer has since cured the default, an upgrade to an appropriate non-BWR D rating may occur simultaneously, subject to curing period guidelines.

7. Debt obligation not rated by BWR

   When an issuer with an outstanding BWR rating defaults on any of its other financial obligations (not rated by BWR), there is a probability that the issuer will default on its BWR rated instruments or facilities. Under normal circumstances, a default on one instrument of an issuer leads to a default rating (“BWR D”) or a near-default rating (“BWR C”) across all instruments of that issuer. In such cases, an evaluation is conducted to determine whether instrument-specific risk mitigants exist, such as external credit enhancements, or whether the defaulted instrument differs in seniority from the other rated instruments. Based on the existence of these risk mitigating factors, if a default on the other obligations is unlikely to affect the rated instrument, the rating on that instrument need not be moved to “BWR D” or a near-default grade.

8. Rescheduling of debt

   Rescheduling a debt obligation with investor consent prior to an upcoming scheduled payment or maturity date is not treated as a default, provided debt servicing was timely up to the point of consent, and the rescheduling was not undertaken to avoid a default or bankruptcy. Under such scenarios, credit risk is evaluated based on the revised payment schedule, and ratings are reviewed accordingly, factoring in the reasons for rescheduling and the circumstances under which investor consent was granted.

9. Default recognition for the reasons beyond the entity’s control

   A missed or delayed payment on a financial obligation (principal or interest) is not recognized as a default when the non-payment arises strictly from circumstances beyond the entity’s control, namely:

   1. Failure to remit payment due to the absence of correct investor information,
   2. Incorrect or dormant account details furnished by the investor(s), or
   3. Instructions received from a government, judicial, or statutory authority to freeze the investor’s account.

   BWRs shall sensitize their clients (issuers) to utilize bank penny-drop verification facilities and/or implement other suitable measures to avoid failures in remitting debt payments (principal and/or interest).

   Under these scenarios, default is not recognized, provided all the following conditions are met:

   1. Clear evidence demonstrates that the entity had adequate funds on the due date to meet the payment obligation.
   2. Proof confirms that the payment failed solely due to one of the scenarios specified above.
   3. The required amounts were duly deposited by the entity into a separate escrow account maintained with a scheduled commercial bank on the scheduled due date.

   Non-recognition of default under these scenarios is disclosed via a press release published on the website. Additionally, required details (as per regulatory guidelines) are provided to the Stock Exchanges, Depositories, and Debenture Trustees on the same day as the dissemination of the rating press release on the BWR website. (see the table below).

   Name of the security	ISIN	Amount to be paid	Due date of payment	Amount of payment made	Amount of payment failed	Reasons for failure of payment

10. In accordance with SEBI guidelines on rating withdrawal, if a rating on a debt security (such as bonds or NCDs) is withdrawn after meeting the minimum required rating tenure (continuously rated for 5 years, or 3 years in multi-CRA scenarios, or 50% of instrument tenure), BWR shall continue to track and include any subsequent delay or default on such security in its official default statistics until the maturity of the security or the completion of the 3-year cohort tracking period, whichever is earlier.

Post Default Curing Period Policy

The curing period principle for default category ratings applies to both fresh rating assignments and surveillance assignments, generally at the issuer level. For fresh rating assignments, a non-default rating is not assigned if the curing period following an earlier default on any instrument of similar seniority remains incomplete. Successful completion of the curing period requires that the account remain regular, and the debt servicing (principal and interest) for all instruments be timely for at least 90 days following regularization of the most recent default. A non-default rating can be assigned only upon successful completion of this curing period.

For facilities or instruments downgraded to the default category and subsequently restructured or rescheduled, the curing period commences from the date the loan restructuring or rescheduling is approved, rather than the cutoff or reference date from which the restructuring becomes effective.

For subordinated or hybrid bonds, because a default does not necessarily imply a default on senior instruments, the curing period applies at the instrument level. However, following a default on a subordinated or hybrid instrument, ratings on senior instruments are not upgraded during the curing period for those subordinated or hybrid instruments.

If a rated instrument features credit enhancement or a structured cash-flow mechanism, the curing period applies at the instrument level, as a default by the issuer on other instruments may not imply or cause a default on the structured instrument.

Upon successful completion of the 90-day curing period, a sub-investment grade rating is generally assigned to the issuer’s outstanding instruments or facilities. An upgrade to an investment grade rating typically requires timely debt servicing (principal and interest) across all instruments for at least 365 days, alongside a credit profile consistent with investment grade standards.

Verification requirements for completion of the curing period are:

1. A clear statement confirming timely servicing of principal and interest payments for 90 days from bankers (for bank loans) and debenture trustees or Issue and Paying Agents (IPAs) (for capital market instruments).
2. A clear statement from the banker confirming that the account has remained standard for the preceding 3 months.
3. 3 months of No Default Statements (NDS) from the
4. 3 months of bank statements (cash credit and term-loan statements) from all lenders showing timely payments and confirming that any cash overdraws were regularized within 30 days.

In case there have been delay in the payment of interest/ principal by the issuer, the issuer shall state the same in the NDS statement, and BWR shall promptly conduct a rating review and disseminate the rating action through press release within 2 [working] days of receipt of such NDS statement.

An entity’s rating may continue in the “BWR D” category even after completion of the minimum curing period if the credit assessment indicates that the entity remains vulnerable to re-default over the short-term following a temporary regularization of debt servicing.

Exceptions to policy

Deviation from the general curing period—90 days for a sub-investment grade rating and 365 days for an investment grade rating—may occur if a structural improvement in the issuer's credit profile is established, or if clear intent, willingness, and ability to make timely debt payments are demonstrated.

Scenarios where such deviations may be permitted include:

1. Infusion of capital into the entity substantially improves its liquidity
2. Merger or takeover of the entity by a stronger entity or change in
3. Favourable regulatory or government actions that directly improve cash
4. Comprehensive facility restructuring that substantially strengthens the entity’s overall liquidity position.
5. Resolution of external or uncontrollable circumstances that led to default (other than specified above in sub- section 3i of this policy). This includes cases where issuers possess sufficient funds to meet repayment obligations and complete all required procedural steps on time.

All instances of deviation from the standard 90-day or 365-day curing period requirements shall be reported to the Ratings Sub-Committee of BWR's Board of Directors on a half-yearly basis, along with the detailed rationale for such deviations

Annexure 1

BWR follows the guidelines prescribed by SEBI for Instrument wise definition of default as given below: