Rating Criteria for Sustainable Debt under the Scheme for Sustainable Structuring of Stressed Assets (S4A)

INTRODUCTION

The Reserve Bank of India (RBI) has been issuing, from time to time, guidelines and norms in order to

strengthen the lenders' ability to deal with stressed assets. After consultations with banks, the RBI has decided

to facilitate resolution of large stressed accounts under the captioned scheme, S4A.

Page 1 of 2Sustainable Debt under S4A - Version 1.0

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THE SCHEME IN BRIEF

• The company/project must have commenced commercial operations

• The aggregate exposure is more than Rs. 500 Crs (including Rupee loans, ECB/Foreign Currency Loans)

• “Sustainable Debt' is one that can be serviced over the same tenor as that of the existing facilities, even if in

the future the cash flows remain at the current level. The Sustainable Debt should not be less than 50%

(fifty per cent) of the current funded liabilities.

• The assessment of the Sustainable Debt is based on the evaluation by an independent Techno-Economic

Viability (TEV) study, duly examined by the Joint Lenders Forum (JLF)/Lenders' Consortium/banks.

• The resolution plan may permit the present promoters to continue to hold majority stake, or a new

promoter may be inducted through well-defined process.

• A forensic audit is done to ensure that there is no malfeasance. The scheme is not applicable if there is any

malfeasance, if there is no change in management.

• No concessions – in the form of rephasement of term liabilities, reduction in interest rates, etc – are

permitted under the Resolution Plan.

• The unsustainable portion of the current funded debt will be converted into equity/Optionally Convertible

Debentures (OCD), subject to a separate treatment. The OCDs will be marked to market based on defined

valuation methodologies.

• An Overseeing Committee, appointed by the RBI, will examine the Resolution Plan and advise on the plan.

• The Resolution Plan will be subject to rating requirement. The rating is restricted to rating of the residual

debt under the plan. The assignment of cases to Credit Rating Agencies (CRAs) will be done by the RBI.

SEBI Registered, RBI Accredited, NSIC EmpanelledBrickwork Ratings

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RATING CRITERIA

Brickwork Ratings India P Ltd (BWR, henceforth) has formulated the following criteria to assess proposals

under the S4A scheme:

a) The eligibility of the borrower entity under the scheme is first assessed.

b) The assessment of the 'Sustainable' portion of the current funded debt is examined for correctness, as

also its conformation to the 'Test of Sustainability', as defined by RBI. For this purpose, Free Cash

Flows (cash flows less committed capital expenditure) are considered.

c) If in case it is for any reason felt that the assessment of the Sustainable Debt needs to be revisited,

clarifications are sought from the banks/relevant agencies.

d) The usual rating risks – management, business and industrial – are examined for acceptability or

otherwise.

e) In the event of a change in promoter is contemplated, either through the route of converting a part of

the debt into equity under the Strategic Debt Restructuring (SDR) mechanism or as per the Prudential

Norms on Change of Ownership of Borrowing Entities (outside the SDR scheme), the credit worthiness

of the new/proposed promoter is given its due weightage.

f) The anticipated future performance of the subject borrowing entity is examined in the light of the

activity, orders on hand, product acceptance in the market, etc.

g) Depending upon the outcome of the various analyses as above, rating is assigned, for the specific

purpose of enabling the lenders to implement the scheme for the subject entity.

h) Considering the special nature of the exercise, it has been decided by the RBI, in consultation with

Securities & Exchange Board of India (SEBI) that these ratings would be exempt from mandatory

disclosure as well as continued surveillance. BWR will follow this guideline.

i) Depending upon the stage of approval of the sustainable debt, BWR may also consider awarding a

'Provisional' rating, to be confirmed later subject to the approval by the JLF.

j) BWR will use the usual Rating Scale for Bank Loan Ratings, with a suffix 'SD' to denote the ratings

under this scheme.

Disclaimer:

It must be clearly understood that a Rating opinion is based on various factors/aspects which includes application of certain Rating criteria. The particular criteria applied depends on a number of factors, inter alia, sector/Industry, historical performance, cyclical trends, prevailing economic condition, group support etc. Rating opinions factor many assumptions and the application of any particular criteria or a set of criteria may be full or partial depending upon peculiarity of each case. Application of any Rating criteria should not therefore be considered as rendering finality or completeness to a Rating assessment. A reference to criteria needs to be perceived in broad terms, only as an aid to a rating decision.