BWR Approach for rating companies opting for Loan Restructuring under the Resolution Framework for COVID-19-related Stress

RBI issued a circular on August 6, 2020 on “Resolution Framework for COVID-19-related Stress. The guidelines provide a window under the Prudential Framework to enable the lenders to implement a resolution plan (RP) in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard, subject to specified conditions.

Subsequently, SEBI vide its circular dated August 31, 2020 provided “Relaxation from Default recognition due to restructuring of debt” to CRAs. This relaxation is applicable till December 31, 2020. As per this circular, if a CRA is of the view that the restructuring by lenders / investors is solely due to COVID-19 related stress or under the aforementioned RBI framework, CRAs may not consider the same as a default event and/or recognize default. Appropriate disclosures in this regard need to be made by the CRA in its press release.

Further, on September 7, 2020 RBI issued a more detailed framework to be adopted for assessment of the entities availing the restructuring.

This document outlines the approach followed by BWR for rating companies currently rated by BWR in the non-default category opting for the restructuring. The approach considers the aspect that the RBI circular does not provide for a standstill of asset classification by banks if a company that has applied for restructuring, misses payments on its debt obligations during the period of invocation or implementation of the RP. On missing debt payments, banks will continue to classify loans under SMA/NPA and subsequently upgrade the status on implementation of the RP.

The rating approach is explained under various possible scenarios:

Scenario 1: Borrower applies for restructuring but continues to meet its debt payments as per current schedule till the new RP is invoked and implemented. Post implementation, the borrower follows a rescheduled debt payment plan.

Rating approach: A rating advisory may be published stating the application for an RP is under consideration and that an appropriate rating will be assigned post implementation of the RP.

Scenario 2: Borrower applies for restructuring but misses its debt payments as per the current schedule, in anticipation of the RP.

Rating approach: BWR will check with the lenders if the RP is being considered for the borrower.

1. If the lender/s confirm the initiation of the RP process, the borrower will not be classified as a “Default”. A rating advisory may be published stating the application for an RP is under consideration and that an appropriate rating will be assigned post implementation of the RP. A rating action including a rating watch could also be done if the credit profile has weakened substantially.
2. If the lender/s confirms that the restructuring application has not been initiated by the borrower or that the lender/s have denied restructuring to the borrower, the missed payment will be considered as a “Default”.
3. The onus of getting a feedback from the lenders will be on the borrower. If the borrower fails to provide a lender feedback, the missed payment will be considered as a “Default”.

In 2) and 3) above, if the RP is subsequently implemented, the ratings will be moved to non-default ratings as per the BWR criteria for curing post default.

Rating approach: The missed payment will not be considered as a “Default”, however, the borrower will need to clear the overdues as per lenders instructions or within reasonable time in the absence of specific instructions from the lenders. Delays beyond this timeline will lead to classification of the borrower as a “Default”.

Scenario 4: The borrower misses its debt payment without applying for restructuring before the due date of payments.

Rating approach: The missed payment will be considered as a “Default”.

The rating post implementation of the RP will be based on the RP implemented for the borrower and its credit profile considering the restructured debt and the business profile of the borrower.