In some instances, CRISIL Ratings may put a ceiling on the allowable quantum of short-term debt based on
the maturity profile of the assets and liabilities, liquidity, and refinancing ability.
Step 4: Evaluate the liquidity backup
Liquidity backup is typically provided to confidence-sensitive instruments, on which the issuer may default in
times of temporary financial stress. These are instruments that are susceptible to default due to loss of
confidence among investors, which may jeopardise the financing options of the issuer as well as other issuers
of the same instrument class and lead to a series of defaults. For instance, if depositors lose confidence in
a bank, they may queue up for premature withdrawal, leading to a run on the bank’s deposits.
Similarly, in the STD market, default by one issuer may cause nervousness among investors about other
issuers and may prompt them to not roll over the STD facilities. Therefore, it is essential for the issuers to
maintain liquidity backup on STD to prevent such financial contagion. The importance of liquidity backup is
reflected in the fact that a majority of CPs are being primarily carved out of working capital limits, despite RBI
allowing the issuance of CP as a distinct product. The maintenance of liquidity backup allows issuers to
weather wide-spread disruptions in the CP market or lack of investor interest in the CP issued.
Liquidity backup for non-FSEs
CRISIL Ratings may not insist on liquidity backup for non-FSE issuers rated ‘CRISIL AA-‘or above on the
long-term scale. That’s because such highly rated issuers typically have substantial liquidity and high
refinancing ability based on their market reputation. However, CRISIL Ratings may obtain liquidity backup
on a case-to-case basis if it believes that this is warranted depending on the analysis of the liquidity of the
issuer, its capital structure, cash flow stability, and the characteristics of the industry in which it operates.
While analysing liquidity, CRISIL Ratings considers the ability of the issuer to meet short-term uses of funds
such as working capital, repayment of maturing debt, and a portion of capital expenditure, without having to
resort to additional borrowing. In all cases, however, the liquidity plan articulated by the issuer is evaluated.
CRISIL Ratings insists on liquidity backup for corporates rated ‘CRISIL A+’ or below. This is assessed for
STD under two options:
• Liquidity backup to the extent of 100% of outstanding STD: CRISIL Ratings insists on 100% liquidity
backup for the value of outstanding STD until its maturity.
• Liquidity backup for STD maturing over the next few days on a rolling basis: Stipulation of 100%
liquidity backup for the entire outstanding STD of highly rated entities may not be necessary in all cases.
That’s because many such entities have strong liquidity as they consistently maintain sufficient liquid
assets to meet short-term requirements. Hence, CRISIL Ratings may stipulate a rolling liquidity backup
for total STD (rated and unrated) maturing, say in the next “N” days. The stipulation of the number of
days is based on evaluation of the specific liquidity plan and other factors such as gearing, current ratio,
debt repayment in the near to medium term, availability of alternative options to meet STD redemptions,
and propensity of the issuer to rely on STD.
The various forms in which a corporate can provide liquidity backup are:
• Drawing power available against unutilised bank lines
• Investments in liquid MFs
• Cash/unpledged fixed deposits in a bank, of a similar or higher short-term rating in comparison with the
issuer
CRISIL Ratings also assesses the quality of the liquidity backup facility while assigning the short-term rating.
For issues that are carved out of the existing working capital bank limit, the limit would function as a liquidity
backup. For other forms of liquidity backup facilities, CRISIL Ratings looks at the nature and commitment of
the facility, its tenure, the strength of the relationship between the issuer and facility provider, and the