Ratings shopping: Lessons from the Amtek Auto default

Sep 24, 2015

- By Vivek Kaul

Vivek Kaul
Amtek Auto was supposed to repay Rs 800 crore of its debt by Sunday (Sep 20, 2015). It has not been able to do so. Media reports suggest that the company has a total debt of Rs 18,000 crore, whereas the Amtek group has a debt of Rs 26,000 crore.

The interesting bit is that this debt that Amtek Auto has defaulted on will not be declared to be a bad loan immediately. As I have often written in the past in   The Daily Reckoning, banks do not like to recognise bad loans immediately.

More often than not they kick the can down the road by restructuring the loan. When a loan is restructured a borrower is either allowed to repay the loan at a lower rate of interest or over a longer period of time or possibly both.

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Deepak Shenoy makes this point on Capitalmind.in: "For a bank holding the bonds[on which Amtek Auto has defaulted on] this account is technically not an NPA [non-performing asset or a bad loan] until 90 days is over. So they can extend and pretend and hope that Amtek manages to salvage itself. Since the banking system has exposure to more than Rs 7,000 crore of loans to Amtek, you can bet your next salary that they will restructure the loan in some way and manage to not call it an NPA at all."

And that is not the only disturbing bit.  Amtek Auto is also a very clear case of rating agencies having been caught napping on their job. The agencies should have seen this default coming. But that did not turn out to be the case.

Care Ratings suspended the rating of the company on August 7, 2015. Before suspending the company Care had rated Amtek Auto at AA-. Care defines an AA rating as: "Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk."Over and above the rating, Care also uses plus or minus for a certain level of ratings. These signs "reflect the comparative standing within the category."

From a rating of AA-, Care stopped rating Amtek Auto. Another rating agency Brickwork Ratings downgraded the debt of the company from a level of A+ to C-. This was a downgrade of 12 levels in a single shot.

Brickwork defines an A rating as: "Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk." It defines a C rating as: "Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations."

It is worth asking here that how did a company go from being categorised as having an "adequate degree of safety" to a "very high risk of default," all at once. The only possible explanation here is that the rating agency was caught napping or just chose to look the other way.

In fact, Amtek Auto is not an isolated case. There have been other such instances as well. As a recent news-report in the Mint newspaper points out: "In the past one year, there have been other instances where ratings have been cut sharply by three notches or more in one revision. In July, CARE Ratings downgraded Jaiprakash Associates Ltd by six notches from a rating of BB to D-, a rating that reflects a default in the debt security. Non-convertible debentures of Bhushan Steel Ltd also saw their rating drop by six notches following a revision by CARE Ratings in December 2014. Punj Lloyd Ltd faced a similar drop in ratings in July."

Monet Ispat and Energy Ltd, Bhushan Power and Steel Ltd, Shree Renuka Sugars and 20 Microns Ltd, are examples of other companies that the Mint news-report points out.

There is a basic problem with the way rating agencies operate. The company which they are rating is the one which pays them as well. In this scenario one rating agency can be played against another, and a company can indulge in ratings shopping.

In fact, ratings shopping was a major reason behind the financial crisis. Banks and other financial institutions looking to rate their sub­prime bonds and other mortgage backed securities played off one rating agency against the other. If they did not get the AAA rating (which is the best rating on a financial security), they threatened to take their business elsewhere.

There was a huge ratings inflation that happened as well. As George Akerlof and Robert Shiller write in their new book Phishing for Phools-The Economics of Manipulation and Deception: "One ratings agency alone, Moody's, gave 45,000 mortgage-related securities a triple-A rating(for the period 2000 to 2007); that generosity for the mortgage-backed securities contrasts with only six US companies that were similarly rated AAA(in 2010)."

This possibly explains that the rating agencies were giving high ratings to subprime and mortgaged backed securities in order to continue to get business from investment bank issuing subprime bonds and other mortgage backed securities.

As Akerlof and Shiller point out: "The originator of the packages [i.e. subprime bonds and the mortgage backed securities], typically an investment bank, was rewarded by high ratings on its offerings. And the ratings agency, in turn, would be shunned if it did not give the investment bank what it wanted. It was in the interest of neither the investment banks nor the ratings agencies to go back and do that extremely difficult-and perhaps impossible-task of opening up the packages and carefully examining their innards [the emphasis is mine]."

This is precisely what has happened in the Indian context as well. In their zeal to get business, the rating agencies awarded these companies higher ratings than what they deserved in the first place. If they hadn't done that the companies would have taken their business elsewhere. Pretty soon shit hit the ceiling and they had to cut ratings by several notches all at once.

To conclude, it is worth repeating here, something that a managing director of Moody's told his employees: "Why didn't we envision that credit would tighten after being loose, and housing prices would fall after rising, after all most economic events are cyclical and bubbles inevitably burst. Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both [the emphasis is mine]."

The Indian rating agencies did something similar as well.

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Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "Ratings shopping: Lessons from the Amtek Auto default"

Subramanian K

Sep 28, 2015

At one point you are saying that the media reports suggest that the company has a total debt of Rs 18,000 crore, whereas the Amtek group has a debt of Rs 26,000 crore.At another place you are saying the banking system has exposure to more than Rs 7,000 crore of loans to Amtek, Are you simply bla blawing without proper data just to make sensational gimmick?


Ravi S Kolathur

Sep 26, 2015

I completely agreed with Vivek Kaul's views and analyses. This is the financial world that we live in, and even make a living out of as well.
In the light of recent amendments to corporate and commercial laws in India, don't these cases offer an opportunity to initiate class-action suits against the companies, and the credit-rating agencies?


Sarat Palat

Sep 25, 2015

Whether rating agencies or auditors, all are same. Money is the final thing. If an investor doesn't want to lose money do your own homework.


Jugraj Singh

Sep 24, 2015

Who is going to rate the Rating agencies.. It still holds true in INDIA. You are on your own.TRUST NO ONE.



Sep 24, 2015

Some other companies which are defaulting on Debt Repayment to retail depositors are: Elder Pharma, Zenith Birla. Rating agencies have failed to be take action proactively.


Rockson Rodrigues

Sep 24, 2015

Hi Vivek,
I love to read your articles as they are prim and proper, very factual.
I share your views on rating agencies getting paid by the companies they rate.
This is the same case with Auditors. I believe that all companies wanting to audit their financials should pay a certain sum of money to the Government who in turn should appoint auditors to audit books of companies. By this method I believe that Auditors will be able to do an unbiased job as the Auditing firms will be paid by the Government and will not be under pressure of loosing the account even if the auditing firm reports the negatives.


Girish Patkar

Sep 24, 2015


You are absolutely correct on rating agencies.The problem is rating agencies do not have the band width to review performance of rated Cos on a regular basis and therefore should not be relied upon by investors for taking investment decisions. There should be a mechanism by which lenders publish list of Cos who have missed the debt servicing date for say two continuous quarters. Let the investors then decide whether to stay invested or not.



Sep 24, 2015

These Agencies must be penalized 2 times the default.



Sep 24, 2015

Who will rate this rating agencies?



Sep 24, 2015

Good analysis by Vivek. Unfortunately every orgn suffers from this malaise.We should not take decision based on report of a single orgn whether it be Rating agency, Research houses,Brokerage companies, Bank appraisal.Margin of safety and conservative determination of Intrinsic values will save nvestors to some extent though there may be cases where we may miss out also.for at least 3 years
As Vivek rightly pointed out, this will not be NPA for at least 3 years

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