Analytical Treatment for One-Time
Restructuring (OTR) due to Covid-19
Related Stress Revised
The Covid-19 pandemic and the related lockdown and supply disruptions have resulted in liquidity stress in most
sectors. This stress has had a significant impact on the repayment capacity of companies having an otherwise good
track record of debt servicing. The Reserve Bank of India (RBI) has released regulatory measures from time to
time to help businesses tide through this crisis. The most recent measure by RBI to this effect is the ‘Resolution
Framework for Covid-19 related stress’ announced on August 6, 2020. Subsequently, Securities and Exchange
Board of India (SEBI) has on August 31, 2020 issued a circular to the Credit Rating Agencies (CRAs) to provide
relaxation from default recognition due to restructuring of debt upto December 31, 2020.
As per the RBI circular, eligible borrowers are companies which are presently under stress on account of Covid-19
and which were classified as Standard, but not in default for more than 30 days with any lending institution as on
March 1, 2020. The eligible borrowers have to apply for restructuring to lending institutions by submitting a
resolution plan. The lending institutions are required to frame board approved policies within the contours of the
RBI circular to approve or reject such plans. The plan is said to be approved, or the resolution is said to be invoked
when 75% by value and 60% by number of lenders agree to the resolution plan. Post approval, there is a process
of signing of Inter creditor agreement within 30 days. The date of implementation of the plan has to be within 180
days of the date of invocation.
Please refer to CARE Ratings’ Default policy for timelines in recognition of default or migrating the rating to CARE
D for different types of instruments/facilities. As per our existing policy on Default recognition:
“Non-servicing of the debt (principal or interest or both) as per the existing repayment terms in anticipation of a
favourable response from the banks of accepting their restructuring application/ proposal shall be considered as a
default. Rescheduling of the debt instrument by the lenders prior to the due date of payment will not be treated as
default, unless the same is done to avoid default or bankruptcy”
The cited RBI/SEBI circulars would require relaxation in the abovementioned clause in our default recognition
policy. Accordingly, CARE Ratings would adopt the following approach in case of entities witnessing stress due to
the pandemic. While this is the broad framework, CARE Ratings would take a view on a case-to-case basis.
In cases where default has occurred as per our default policy the following framework will be adhered to in different
circumstances that are outlined below:
Analytical Treatment for one-time restructuring (OTR) due to Covid-19 related stress Revised
• For Default recognition in case of rated Bank facilities where there are missed payments
Entity has applied for
resolution under framework
After due date of
repayment
Default to be recognised
Rating will migrate
to CARE D
Before due date of
repayment
Application accepted Application pending Application rejected
and framework being with lenders (period (framework not being
implemented between application implemented)
and implementation)
Not a Default Not a Default if payment
Not a Default made in stipulated timelines
Default to be recognised
if payment made after
stipulated timelines
• For Default recognition in case of Capital Market Instruments/Money Market Instruments
In case of securities, CARE Ratings will not recognise default on non-payment of dues towards
instruments, only if approval for restructuring of payment terms of the instrument has been availed from
all the investors before the due date. CARE Ratings may also not recognise default if the investors have
granted an in-principle concurrence to the borrower prior to the due date (to be formalized in due course)
for restructuring of payment terms of the instrument. If any investor disagrees or decides to proceed with
recovery (under laws including IBC), CARE Ratings will be required to recognize a default.
Application and Approval for
restructuring from all investors before
due date of repayment
Yes No
Default not recognised Default recognised
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Analytical Treatment for one-time restructuring (OTR) due to Covid-19 related stress Revised
• Further, in case of capital market/money market instruments subscribed by banks/All India Financial
Institutions/NBFCs (including HFCs) and forming part of the application under OTR framework, the default
recognition in case of a missed payment will be the same as that applicable to bank facilities as mentioned
above.
• In cases where due to the above framework, a default is not recognised or rating is not migrated to D,
CARE Ratings may take an appropriate rating action (rating revision/credit watch/change in outlook), as
warranted, to reflect the credit quality of the issuer. To clarify further, if in CARE Ratings’ view the credit
profile of the issuer has become structurally weak due to the economic fallout of Covid-19 or otherwise
and the degree of safety towards timely servicing of financial obligations has weakened from the
outstanding rating levels, CARE Ratings will take appropriate rating action.
Note on complexity levels of the rated instrument: CARE Ratings has classified instruments rated by it on the basis of complexity.
This classification is available at www.careedge.in. Investors/market intermediaries/regulators or others are welcome to write
to [email protected] for any clarifications.
3
Analytical Treatment for one-time restructuring (OTR) due to Covid-19 related stress Revised
[For the previous version please refer ‘Rating Methodology - Fertiliser Companies’ issued in
May 2020]
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CareEdge is a knowledge-based analytical group that aims to provide superior insights based on technology, data analytics capability
and detailed research methods. CareEdge Ratings is one of the leading credit rating agencies in India. It has an impressive track
record of rating companies for almost three decades and has played a pivotal role in developing the corporate debt market in India.
CareEdge provides near real time research on all domestic and global economic developments. The wholly owned subsidiaries include
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Disclaimer:
The ratings issued by CARE Ratings Limited are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not
recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. These ratings do not convey suitability or
price for the investor. The agency does not constitute an audit on the rated entity. CARE Ratings Limited has based its ratings/outlooks based on information
obtained from reliable and credible sources. CARE Ratings does not, however, guarantee the accuracy, adequacy or completeness of any information and is not
responsible for any errors or omissions and the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by
CARE Ratings Limited have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE Ratings Ltd. or its subsidiaries/associates
may also be involved with other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE Ratings
Limited is, inter-alia, based on the capital deployed by the partners/proprietor and the current financial strength of the firm. The rating/outlook may undergo a
change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant
factors. CARE Ratings Limited is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE Ratings.
Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of
rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades
