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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