ICRA has announced a new credit rating system for the Indian 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.
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.
Source: ICRA Press Release