Q 5 .

Discuss the morality of rating agencies that continue to rate such companies with
investment grade (i.e., BBB) and above ?

Rating any agency plays a vital role in providing investment grades based on the performance of
company which in turn help banks in deciding whether to issue loan or not. However, unsurprisingly,
we found that rating agencies and the banking system were yet to ring the alarm bells on several of the
overleveraged companies . Although the corporates servicing these loans face a worrisome situation,
rating agencies so far don’t seem to think that these companies could be headed for a default-like
situation. For 12 of the debt-burdened companies that landed in default net, their ratings have not been
lower than BB. Of this, 10 were investment grade, that is, BBB and above. Only in six instances has
the rating been pegged at D, that is, default.

In some of the cases, ratings awarded based on the brand name or repute associated with the parent
company. This will led to the scenario wherein banks will lend loans to the overleveraged/ debt
burdened companies and may led to fall of financial condition of banks as well as whole economy. So,
morally it is completely incorrect to rate companies BBB and above without referring debt condition
of company.

While it is not right to paint all the rating agencies with the same brush, certain rating agencies are
giving out as much ratings as they can without doing due diligence. How can these rating agencies
justify investment grade ratings (i.e. BBB-).This is like a speculative trade; if the company is lucky it
will be able to pay off its debt but on the basis of hard numbers it doesn’t look likely. Certain agencies
are reluctant to detect stress as money matters dictate their business approach.” About 13 companies
on the case list are yet to enter bankers’ intensive care unit — CDR or 5/25. These include Adani
Transmission, BF Utilities, Bombay Dyeing & Manufacturing Company, Century Textiles and
Industries, Dalmia Bharat, Jaiprakash Associates, Jaiprakash Power Ventures, JBF Industries, Jet
Airways, KSK Energy Ventures, Sadbhav Engineering, Sadbhav Infrastructure and Tata
Teleservices. Companies such as Tata Teleservices and IL&FS Transportation Networks’ ratings may
be supported by the ratings of their parents Tata Sons and IL&FS, although one might question to
what extent the parent will support the child.

Rating should be done genuinely by looking the debt-equity and interest coverage ratio of companies
in past few years as well as its ability repay the interest and base value amount. Banks follow these
ratings before lending loans to the companies. So, if the ratings are not done properly then it is
unethical as well as morally incorrect and may led to outstanding debt burden over market.
 Q6. AOL1
SL.No Domain Search/ Identify
Key facts, Key figures,Key data, Key
1 4. Rating agencies and banking system not raising alarms
information
Key subjects,Key objects,Key
2 properties and Key events
(SOPEanalysis)
3 Timeline of key events
Analysis
1. Evergreening of loan keeping several overleveraged company
alive & risk of bad debt condition in future.
2. Debt serving ability has worsen for most corporates.
3. Total outstanding debt of FY-15 stands at Rs. 733500 Crs (10
corporate groups).
against overleveraged corporates.
5. Loans are given under political pressure.
6. Debt-equity raio & intrest coverage ratio of the companies
are higher in FY 15 as compared to FY 14 (Source- Credit Suiss
table, case).
Subject - Highly leverage business group
Object - Banking sectors over burdened due to worse debt
serving ability of corporates.
Properties - Bad debt, debt servicing, refinancing, rolling over.
Events - HDFC bank sold its ESSAR steel exposure for Rs.550 Crs
to an asset restucturing company
Borrowings of 10 coorporate groups (in Crs):
1. FY-07- Rs. 100400.
2. FY-08- Rs. 146500.
3. FY-09- Rs. 224200.
4. FY-10- Rs. 282000.
5.FY-11- Rs. 377300.
6. FY-12- Rs. 554800.
7. FY-13- Rs. 652300.
8. FY-14- Rs. 694400.
9. FY-15- Rs. 733500.
Debt equity ratio of all corporates increased in FY-15 as
compared to FY-14 raising concern of bad debt condition.
The genesis of the problem is politically directed loans made in
2009 and 2010 and genuine errors of judgment made in 2008.
Over the past eight years, corporate debt of the top 10 over-
leveraged corporate groups covered by the Credit Suisse list
grew by a whopping seven times.

Explanations of SOPE? Key
4 3. Agencies rating the corporates are not based on the
explanation?
Identification of Key Problems?
5
Underlying key problem?
6 Problem Formulation
7 Problems solutions alternatives?
8 Optimal strategy
Major Antecedents of SOPE :
1. Evergreeing of loans to the over leveraged banks.
2. Politically directed loans made in 2009 and 2010.
3.Rankings offered to the companies based on the brand name
of parent company. Ex- Tata telesevices rating is respectable
despite of debt burden due to brand of Tata sons.
Major Deteminants -
1. Liquidity and asset-based ratios indicate that some
companies may find it hard to survive.
2. Absence of expert to detect bankruptcy well in advance.
performance or debt condition.
Major Concomitants - 1. Poor financial condition of banks due
to non payment of debt by companies.
2. Risk of bankruptcy companies due to easier loan lending
facility by banks.
3. May led to economic recession if major corporates unable to
pay back the loans.
What are controllable variable (X) ?
1. Issuing of loans to overleveraged companies
2. Ranking system for corporates based on debt they carry.
What are uncontrollable variable (Y) ?
1. Smaller banks lending loans as bigger banks puting
pressure.Banks will try to produce money by getting interest
amount from big loans.
2. High debt risk in power, construction and road business.
To what extend Y dominates X ?
Y dominates over X as even if small banks unwilling to pay loans
to overleveraged companies bigger banks will lend loans just to
have interest amount and better business ahead. If lending of
loans are not controlled then it will create situation of
economic crisis.
Banks issuing loans to the over leveraged companies resulting
in risk of getting back the money from companies. This will
worsen the economic condition of country. In last 8 years,
corporate debt of top 10 overlevarged companies grew 7 times.
Banks should lend loans based on the better debt-equity ratio
and financial condition of the company. Ratings of company
should be based on actual debt condition and not based on the
brand value/parent company.
A group of expert should help bank in getting the details about
debt serving ability of company and ratings done should be
genuine.