A provisional rating is a bond rating that is subjected to change based upon specific provisions. It is an estimation of the probability of default on the payment of interest and principal on a debt instrument. If a bond was meant to finance is completed and starts generating revenue, a provisional rating is likely to grow. While, if an issuer’s debt reaches a higher level, a provisional rating is likely to decline. These ratings only give an idea to the investor and the investors are required to make their independent analysis before reaching to any conclusion.

The market regulator of India, SEBI recently came out with a new structure to strengthen and standardize the policies on provisional rating by credit rating agencies (CRAs) for debt instruments. According to the new structure, SEBI demands that the provisional ratings for debt instruments must be prefixed as ‘provisional’ before the rating symbol in every information medium. A rating will not be considered as final in circumstances where certain compliances that are essential to the assignment of credit rating are yet to be complied.

The important highlights of the framework are discussed below:

Rating Symbol: All long-term and short-term provisional ratings for debt instruments shall be prefixed as ‘Provisional’ before the rating symbol in all types of information and communication mediums such as rating letters, press releases, rating rationale, etc.

Standardized Term: A rating will not be considered final if the following points occur,

• Execution of a letter of comfort, corporate guarantee, or other similar documents.
• Execution of documents such as debenture trust deed or debenture trustee agreement, legal agreements, final term sheet.
• Assignment of loan or finalization of cash flow escrow arrangements.
• Setting up of debt service reserve account.
• Opening of the escrow account.
• For a proposed Real Estate Investment Trust or Infrastructure Investment Trust, pending formation of trust only after receipt of SEBI Registration.

Validity period:

• A consistent final rating must be provided within 90 days from the date of issuance of the debt instrument.
• Extension of 90 days may be given on a case-to-case basis.
• After 180 days, no CRA shall assign any provisional rating to a debt instrument.

Press disclosures:  While assigning provisional ratings, the following disclosures shall be included:

• Pending documentation considered while assigning the provisional rating.
• The associated risk with the provisional credit rating like present in the absence of completed documentation.
• The alternate rating could have been assigned in absence of the pending documentation.
• It must be specified in the press release that the debt instrument is subsequently issued and the provisional rating has been converted into the final rating.
• The press release must also specify the rating and timeline implications as per the validity period.

Unaccepted provisional rating: If the assigned provisional rating is not accepted by the issuer, then disclosure shall be provided by the credit rating agency in the “non-accepted ratings” published on their website.

 This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Consulting & Governance shall not be responsible for any errors caused due to human error or otherwise.