Crisil ‘AAA’ rated FDs live up to ratings, no slip to default grade

Our Banking Bureau

Mumbai, Aug 31: Credit Rating Information Services of India (Crisil) has said that none of its ‘AAA’ rated long-term and fixed deposit (FD) instruments have ever been downgraded to the default (D) catergory.

Releasing the details of an internal study, the rating agency said that a rating indicates “probability of default” to the investor and even ‘AAA’ ratings do have a finite default probability.

“In the international context, there have been a few instances of ‘AAA’ rated entities defaulting over a period of time. Standard & Poor’s, the world’s leading rating agency, in its over 100-year history of corporate ratings, has three defaults — one each in 1988, 1990, 1994 — by companies which were at some point rated in the ‘AAA’ catergory. However, these ‘AAA’ defaults have been far and few, and statistics establish that the probability of a ‘AAA’ company defaulting is significantly lower than all other rating categories,” Crisil said.

In the local context, there have been two instances of companies rated a ‘AAA’ by rivals — Apple Finance and Lyolds Finance — being succesively downgraded to “default” category over a period of time.
The Crisil study is based on an analysis of the default behaviour of long-term and FD ratings of the rating agency’s portfolio during the period 1991-2000. These firms range from manufacturing companies, non-banking finance companies, stated-owned entities, infrastructure companies, banks and financial institutions.

The study reveals that that no entity rated ‘AAA’ by or ‘FAAA’ by Crisil have ever gone in default mode. And just how stable are Crisil’s ratings in general.

The average one-year transition matrix shows that out of all ‘A’ rated companies at the begining of a year, 82.3 per cent have remained in that category while 3.3 per cent have been upgraded to ‘AA’.

At the same time, 8.8 per cent have been downgraded by ‘BBB’, 3.2 per cent to ‘BB’ and so on.

“The study reveals that ‘AAA’ ratings show the highest degree of stability as no ‘AAA’ long-term instrument was downgraded below the ‘AA’ category in the entire history of Crisil ratings”, a statement issued here claimed. In fact, no ‘AAA’ rated entity has ever downgraded to less than ‘AA’ in Crisil history.

Crisil said that while the primary objective of a rating is to signal the investor on probability of timely payment of interest and principal, an important issue in this context is the timing of the ratings action.

“Crisil downgrades the rating to ‘D’ as soon as the entity defaults on the rated instrument.

It has been observed in the past that usually, delays to banks and delays in the reschedulement on loans from financial institutions occur much in advance to a default on publicly issued or privately-placed debt securities”, the rating agency said.