Bond issuers seeking credit enhancement from banks will need rating from two agencies

Mumbai: Corporate bond issuers seeking partial credit enhancement –PCE from commercial bank will have to get the issue rated from a minimum of two rating agencies, the Reserve Bank has said. For computing capital requirements for the PSW, banks have to reckon lower of the two ratings, the banking regulator clarified.

In a notification issued to all commercial banks on Thursday, the Reserve Bank said, “To be eligible for PCE from banks, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times “ It further clarified that the both the rating reports have to disclose both standalone credit rating - without taking into account the effect of PCE, as well as the enhanced credit rating - taking into account the effect of PCE.

A credit enhancement is a method whereby a borrower or a bond issuer tries to improve its credit worthiness through which the investor or the lender is assured that the borrower will honour the obligation through additional collateral, insurance, or a third party guarantee. The third party here is the commercial bank offering the PCE.

It may be recalled that the Reserve Bank in September 2015 had allowed banks to offer anirrevocable PCE for infrastructure bonds upto 20% of the value of the issue size. The bonds nned to have a minimum investment grade rating of BBB- or better.

For the purpose of capital computation in the books of PCE provider, lower of the two standalone credit ratings and the corresponding enhanced credit rating of the same rating agency shall be reckoned, RBI clarified.