CRISIL believes the decision of the Reserve Bank of India (RBI) to enable lenders to permit a one-time restructuring of loans will ease the liquidity pressure on companies amid the Covid-19 pandemic.

CRISIL will factor in the impact of debt restructuring on its rated credits as and when the process is initiated, and its rating action will depend upon the timeliness and terms of the restructuring of debt.

Also, CRISIL’s rating actions will continue to factor in any structural deterioration in the credit risk profiles of its rated companies amid prolonged business-side pressures, or such other reasons, in the normal course of rating reviews.

As per the RBI’s announcement dated August 6, a restructuring window will be open only for companies which are under stress due to the pandemic and which were classified as standard, but were not in default for more than 30 days with any lending institution as on March 1, 2020. Other contours of the restructuring window are being worked out by the RBI, and will remain a monitorable.

Several corporates are likely to explore the opportunity to restructure their loans in order to conserve liquidity, especially given the continued weakness in demand amid economic recession.

Says Subodh Rai, Senior Director, CRISIL Ratings, “Debt restructuring can lead to multiple situations and likely rating actions. CRISIL recognises default on the first instance of missed payment on a rated instrument. Therefore, any stoppage of debt servicing without final documented approval of the respective bank may lead to rating action.”

CRISIL’s analysis will centrally take into consideration the rated entity’s resilience and its expectations on the pace and extent of normalisation of its cash flows. In addition, the revised debt repayment terms post restructuring will also play a crucial role.

Given that the moratorium announced by the RBI is ending on August 31, and the cash flows across a vast majority of rated entities are taking time to normalise, timely support from the lenders in terms of approving restructuring plans quickly will be critical to avoid sharp credit cliffs. Assuming the restructuring terms formulated by the bankers are aimed at ensuring the credit profile remains broadly in line with the pre-Covid-19 levels, the following scenarios could evolve:

• Scenario 1: If the restructuring application is approved by the lenders before due date of repayment, the rated entity’s credit profile is unlikely to face any sharp rating action
• Scenario 2: If the restructuring application is made before due date of repayment and the lenders are not averse to accepting the application, but a formal approval is awaited, CRISIL may place the ratings under “Watch”; the formal restructuring approval will be required to resolve the watch
  
• Scenario 3: If the restructuring application is made before due date of repayment, but the lenders have reservations against the application, though the final decision is yet to be formalised, the ratings could be downgraded and also placed on “Watch Negative”
  
• Scenario 4: If the restructuring application is made after the due date of repayment and repayments are missed in the interim, the ratings could be downgraded to default rating “CRISIL D”
  

While the broad framework has been given above, CRISIL will take a view on case-to-case basis after factoring in the standalone credit risk profile of the company, while factoring in the relaxations given by the Securities and Exchange Board of India for process-related issues amid the pandemic.

As the market leader in India, with ratings covering more than 18,000 large and mid-scale corporates and financial institutions, CRISIL remains committed to providing high-quality ratings, strong analytical rigour and exceptional service standards in all its offerings to customers and other stakeholders.