The Reserve Bank of India has revised its guidelines for banks providing partial credit enhancement (PCE)s to corporate bonds and said to be eligible for PCE from banks, corporate bonds would have to be rated by a minimum of two external credit rating agencies. In September 2015, the central bank allowed banks to provide PCE to bonds issued by corporates and special purpose vehicles (SPVs) for funding projects. As per the RBI’s guidelines, banks could provide PCE to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit, which would be drawn in case of shortfall in cash flows for servicing the bonds, thereby improving the credit rating of the bond issue.
The objective behind this measure was to enhance the credit rating of bonds and to enable corporates to access funds from the bond market on better terms. “The rating reports, both initial and subsequent, shall disclose both standalone credit rating (rating without taking into account the effect of PCE) as well as the enhanced credit rating (taking into account the effect of PCE),” the RBI said in a notification on Thursday.
If the standalone credit rating of a bond improves over a period of time, the capital requirement may be recalculated on the basis of the reassessed standalone credit rating and the reassessed enhanced credit rating, without reference to the constraints of capital floor and difference in notches,the central bank said.