ICRA launches new credit rating system for infrastructure sector; aims at better risk-based pricing and more access to long-term lenders
Supporting the initiatives of the Ministry of Finance, ICRA today has announced the country’s new credit rating system for the infrastructure sector. The new rating framework will be a comment on the expected loss (EL) of a project entity, which would factor in the probability of default (PD) and the recovery prospects.
Infrastructure projects in India have seen limited participation from long-term investors and bond markets on account of higher perceived risks and lower credit ratings. The conventional ratings, based on the concept of ‘single day, single rupee’ delay, tend to be constrained on account of relatively short debt tenure, compared to the overall economic life of the project, unpredictable ramp-up periods, and cash flow volatility, resulting from risks pertaining to counterparties, markets and operations.
Mr. Shubham Jain, Vice President, ICRA Limited, said: ‘’The adoption of the proposed rating system for the infrastructure sector will enable better risk-based pricing and can also help in opening up long-term funding avenues for the sector. This will be significantly useful in case of fundamentally strong projects which face temporary cash flow mismatches during the extended lifecycle of the project.’’
Once stabilised, infrastructure projects often have a nearly monopolistic market position, relatively high pricing power and low technological obsolescence risk. Further, Public Private Partnership (PPP) infrastructure projects have additional safeguard features like availability of termination payments, contractual protection, etc. Also, as experienced in both domestic and international markets, the default/loss risk in case of infrastructure projects reduces significantly once they achieve stabilisation phase. In order to adequately incorporate these distinct and unique characteristics, a new credit rating system for Infrastructure projects has been developed in consultation with the Ministry of Finance (MoF) and associated stakeholders.
The new rating system will focus on the overall recovery of dues by the investor/lender, a metric that can be evaluated subsequently, making this scale amenable to get itself evaluated for its differentiating and predictive capability. Under the new rating scale, final ratings will be assigned on Expected Loss on the scale from [Infra] EL 1 to [Infra] EL 7, where instruments rated ‘EL 1’ would be considered to be having the lowest expected loss and instruments rated ‘EL 7’ the highest.
The new system has been formulated post in-depth market research and detailed interactions with various stakeholders, including lenders, investors, multi-lateral agencies, concessioning authorities, developers and regulators.