S&P rates Tata Steel, Infosys above sovereign

Earlier, SBI and ICICI Bank were assigned ratings higher than that of sovereign rating .

Tata Steel today pierced India's sovereign foreign currency rating by Standard & Poor's (S&P) following a review of the country's foreign currency transfer and convertibility risks. Infosys Technologies, which is already enjoying a rating higher than the sovereign, has been further upgraded by the global rating agency.

Moody's had earlier assigned ratings to State Bank of India (SBI) and ICICI Bank higher than the sovereign rating. SBI's $1-billion overseas debt programme was assigned Baa2 by Moody's against the sovereign rating of Baa3.

The upgrading of the two Indian firms is part of an exercise by S&P that has led to the raising of non-sovereign foreign currency credit ratings of 10 Asian companies. The ratings have been revised as S&P considers sovereigns "under political and economic stress less likely to restrict non-sovereign entities' access to foreign exchange needed to service debt".

India's local and foreign currency ratings are both at BB+ with the foreign currency transfer and convetibility (T&C) assessment at BBB. S&P has raised Tata Steel's foreign currency rating to BBB Stable from speculative grade BB+ Stable and Infosys Technologies' to BBB Stable from BBB- Stable. An obligation rated BBB by S&P exhibits adequate protection parameters, while those rated BB are regarded as having significant speculative characteristics.

S&P has said in a statement that the rating revisions mean that certain non-sovereign entities, considered well-insulated from direct and indirect sovereign risks, can achieve a foreign currency rating that exceeds the sovereign foreign currency rating.

This reasoning is based on S&P's revised ratings criteria released in its sovereign criteria report titled "Ratings Associated with Risk of Foreign Exchange Controls in 27 Countries".

The rating report says that in order to be eligible for such ratings, corporate entities need to demonstrate moderate leverage, strong free-cash flows and competitive business profiles. Other factors taken into consideration include strong offshore parent support, geographical diversity of operations, and structural support features.

The ratings agency has said that as a result of the revised sovereign rating criteria, there is increased potential for entities to have a foreign currency rating above a sovereign. The reassessment exercise will lead to a lesser number of split local/foreign currency ratings, because the foreign currency rating will be constrained less often by the reduced risk of the sovereign, restricting access to foreign exchange needed for debt service.

The criteria adjustment reflects the S&P view that, for many countries, the risk of the sovereign rating restricting access to foreign exchange has diminished.

This reflects globalisation and associated pressures to avoid imposing foreign exchange controls, the need to restrict capital flight more than legitimate debt service and difficult economic environment and deteriorating credit culture that often accompany sovereign stress, leading to higher non-sovereign default rates.

Prior to this change, S&P's rated non-sovereign issues and issuers above the sovereign on a foreign currency basis in these countries only if there were specific factors moderating cross-border transfers and convertibility risks.