Important work remains for India's bankruptcy revamp. A 2016 law significantly improved the efficiency of the debt resolution process. However, S&P Global Ratings believes regulators will likely be looking to add more certainty to the timeframe of such proceedings, with fewer legal issues hanging over a given bankruptcy workout.

The Indian Bankruptcy Code 2016 (IBC) has typically resulted in faster results and higher recovery values for lenders than could be obtained through lengthy liquidation proceedings. The code has promoted a credit culture that encourages restructurings of going-concern entities.

The average resolution time is now under two years, according to official data. Prior to IBC, this process took six to eight years. Recovery values have also improved to over 30% from 15%-20% under the previous bankruptcy regime.

Investors often ask us how the IBC has changed the risk factors surrounding their investments in Indian corporate bonds, and what reforms lie ahead for the code. We address their most common queries below.

Frequently Asked Questions

How has the revamped resolution process affected our ratings?

It has introduced more rigor in the distribution of proceeds based on the legal ranking of claims. Secured creditors and structurally senior creditors should now recover more value compared with unsecured and subordinated creditors.

Data on secured and unsecured recoveries is not always separately reported for resolution cases. However, we now understand that there is a greater distinction between secured and unsecured debt. The recovery value of secured creditors are often several multiples that of the unsecured claims.

As a result, we would now notch down our ratings on the unsecured debt of Indian issuers. We view unsecured creditors to be significantly disadvantaged in a potential resolution process, relative to the more senior creditors.

Prior to the IBC, we viewed the priority of claims in a bankruptcy resolution scenario to be highly uncertain. As a result, we did not reflect post-bankruptcy scenarios or relative subordination of unsecured creditors in the capital structure in the issue rating, which was always equalized to the issuer rating.

Typically, in other more creditor-friendly jurisdictions, if unsecured creditors were substantially disadvantaged, we would notch down the issue rating from the issuer credit rating.

What approach do you take to assigning issue ratings in "Group C" jurisdictions?

We do not notch up issue ratings from the issuer credit rating in Group C jurisdictions, i.e., areas with the weakest resolution frameworks.

We equalize the issue rating with the issuer credit rating if all of the following three conditions are satisfied:

• Our rule-of-law risk assessment is 4 (moderately high) or above;
• Our creditor-friendliness assessment is 4 (weak) or 5 (very weak)
• The creditor-friendliness subfactor "Conformity of the distribution of proceeds to legal rankings of claims" is scored as 4 (negative).

India's jurisdiction assessment meets the first two conditions as the rule-of-law assessment is 4, and the country's creditor-friendliness score is 4.

However, the assessment of "Conformity of the distribution of proceeds to legal rankings of claims" is now 3 (inconclusive). Accordingly, we now will not automatically equalize our issuer rating on Indian entities to the issue ratings. The issue rating will, instead, be also based on our assessment of the priority of claims in a debtor's capital structure.

We classify insolvency regimes into three groups, which in turn form the jurisdiction ranking assessments: Group A, Group B, and Group C. The weaker resolution frameworks of Group C make the priority of claims in a resolution process more uncertain.

How are issue ratings notched down in Group C jurisdictions?

We may reduce issue ratings by one notch if we believe the rated debt could be significantly disadvantaged to more senior debt. Accordingly, secured debt ratings are equalized with the issuer rating.

The following are scenarios where we could view unsecured debt to be disadvantaged relative to senior debt:

First,  the ratio of a company's consolidated secured debt to total debt is higher than 50%, because secured lenders have priority over unsecured lenders.

Second,  the total debt of all the issuer's subsidiaries plus secured debt of the issuer (priority debt) is more than 50% of the issuer's consolidated debt. We take this view because--if subsidiary debt is significant--the rated debt could be meaningfully structurally subordinated if the group's income-generating assets are in subsidiary operating companies, rather than at the level of the issuer of the rated debt.

We consider the structural subordination to be mitigated if at least 30% of the group's earnings, cash flow, or other similar financial metrics are derived from operating assets owned by the issuer, or from subsidiary guarantors that provide upstream guarantees to the rated debt.

We consider unsecured debtholders to be not disadvantaged relative to senior debtholders if the issuer's financial leverage is low. A financial risk profile assessment of minimal or modest indicates that the financial leverage is low enough.

What are the main outstanding issues to address for the resolution framework?

Mainly, delays in resolution initiation and execution make uncertain the time it takes to conclude a restructuring.

We believe legal inefficiencies can delay resolution. These inefficiencies may include capacity limits to Indian bureaucracy, and the Indian courts. Many resolution frameworks globally allow for reconciliation periods between creditors and the debtor. In practice, that may mean putting off the start of a formal resolution. Moreover, legal challenges by the debtor may delay resolution initiation.

We also believe that the large number of pending cases and constraints on the court process could delay the conclusion of a restructuring.

Similarly, we have seen delays to the execution of approved restructuring plans. These usually arise from legal challenges from either the existing promoter/owners, aggrieved creditor groups, or from other bidders participating in the resolution package.

What residual issues do we see with creditors' ability to enforce claims on collateral?

Select resolution cases have also raised the question about creditors' ability to enforce superior or priority collateral. That is, if some creditors have claims to superior collateral, should their recovery value be higher than other secured creditors?

In our view, a court ruling that priority collateral must be respected has positive credit implications. However, there is still no clear precedent to respect the relative seniority of collateral held by creditors. We typically view secured debt to incorporate mortgages, floating charges, pledges and senior liens.

Given these uncertainties, India remains a "Group C" jurisdiction. This means we do not assign recovery ratings or notch-up issue ratings where substantial recovery is available to secured creditors, from the issuer credit ratings.

The Insolvency and Bankruptcy Board of India and the government have been looking at ways to improve the efficiency of the process and reduce delays.

For example, by increasing judicial capacities, increasing the frequency of creditor committee meetings, looking at prepackaged solutions, etc., the country could create a more efficient legal process for creditors to implement resolution plans. The outcome would be supportive of a higher jurisdiction assessment, moving India into a "Group B" assessment.

However, we no longer view the conformity of the distribution of proceeds based on legal ranking of claims to be a negative factor in the resolution process, as we did earlier. Accordingly, we notch down issue ratings when unsecured or structurally subordinated creditors are significantly disadvantaged in the issuer's capital structure.

Why are we only reviewing India's jurisdiction assessment now, even though the IBC has been in effect for a number of years?

We examined India's jurisdiction as part of a review of all jurisdiction assessments globally (see "Jurisdiction Ranking Assessments Update: October 2024," published on RatingsDirect on Oct. 10, 2024).

We periodically review our jurisdiction assessments. We could also review an assessment on an ad hoc basis if there were any material developments warranting a review.

We typically look for a meaningful record before making changes that could have material implications on issue ratings. With resolution data available for over seven years now under the IBC, we believe there is enough information to change our assessment on the conformity of proceeds to legal claims.

Why notch down ratings on unsecured debt issues?

An issue rating is an assessment of default risk. However, it may also incorporate an assessment of seniority and recovery prospects in the event of default. This may involve notching down junior obligations when a company defaults, as the loss will likely be greater for creditors that do not benefit from priority.

Issue credit ratings are based, in varying degrees, on our analysis of the following considerations:

• The likelihood of payment--the capacity and willingness of the obligor to meet its commitments;
• The nature and provisions of the obligation; and
• The seniority of the financial instrument under a bankruptcy and reorganization.

Editor: Jasper Moiseiwitsch