The Securities and Exchange Board of India’s (Sebi) guidelines for rating agencies on disclosures has left some gaps that need to be filled, according to fund managers.
According to mutual fund (MF) players, it would help the fund manager take a more informed investment call if he knew the scenarios under which the ratings can change. Further, a detailed disclosure of the weightage being accorded to each rating factor within different sectors, would help improve the predictability of rating changes, MF players says.
On Tuesday, Sebi issued guidelines that require rating agencies to make disclosures on promoter support, linkages with subsidiaries and rated entities’ liquidity position to meet near-term payment obligations.
Sebi’s move has been seen as a direct consequence of the IL&FS episode, as lack of clarity on similar issues was seen to be the cause of the entity’s sudden multi-notch downgrade to default status. The sharp rating action had hurt the net asset value (NAV) of quite a few schemes that were holding IL&FS group papers. Fund houses had to take a 50 per cent haircut on their IL&FS exposures. In some cases, the haircut was 100 per cent.
“The rater uses historical data to come up with ratings. However, investors need to base their decisions on the future outlook. So it is important that rating agencies start to share key assumptions based on which they came up with the ratings -- and if these assumptions change, how the ratings will get impacted. The fund managers can also test if these assumptions are valid,” said Pankaj Pathak, fund manager–fixed income, Quantum MF.
Experts say if disclosures were up to global standards, fund managers would have been able to steer clear of some of the sectors that are under pressure currently.
“Most NBFCs were growing at 30-40 per cent. This meant that their internal equity generation was quite high. So, the leverage was contained to that extent. Fund managers would have had a better reference to take their investment decisions, had agencies disclosed how the ratings could change as and when this high-rate of growth starts to plateau,” said another fixed-income fund manager, requesting anonymity.
Disclosures on weights being assigned to sector-specific risk-factors and how ratings can change in different scenarios are already being made in more developed economies. For instance, while downgrading outlook on Tata Motors from stable to negative on Wednesday, Moody’s disclosed scenarios in which the rating action can turn negative.
“The ratings could be downgraded if there is any pressure on JLR's ratings; or Tata Motor’s ex-JLR businesses delivers sub-par performances because of weak market conditions, input cost pressures, disappointing new products, or a significant ceding of market share. On specific credit metrics Moody's will watch for a downward rating if consolidated debt/EBITDA exceeds 4.5 times, and EBITA margins remain below four per cent, both on a sustained basis,” Moody’s said in its note issued on Wednesday.
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On the positive side, Moody’s said, “Any revision to Moody's support assumptions from Tata Sons will also prompt a revision to the one-notch uplift in Tata Motor’s ratings. A stabilisation in JLR's outlook would be a precursor for TML's ratings outlook to return to stable.”
The note pointed out that the principal methodology being used for the rating was ‘Automobile Manufacturer Industry’, which uses nine rating factors for auto companies. In the said methodology, market position and product strength has been given 30 per cent weightage, Ebitda margin has been given 20 per cent weightage, leverage has been given 10 per cent weight.