Which sectors are more prone to default? Some CRISIL default study insights

While browsing the CRISIL website for some rating rationales, I stumbled upon their default studies, which had some interesting data. In the 1997-98 Asian crisis, the defaults had risen(unsurprisingly not in the dot.com bubble burst since India had not many tech startups then) as they are rising now post the subprime crisis. While the explosion of the ratings base(over 3000 ratings in 2010 versus just 900 in 2009) may render the numbers non comparable, an important insight lies in the sectoral breakup.


Source:- http://www.crisil.com/pdf/ratings/crisil-rating-default-study-2010.pdf published in May11

Textiles and metals invariably ask for government help for their capex(TUFS scheme), raw materials(export ban/duties on ore), utilities costs(power, railway), marketing(by textile fair funding etc). And the reason is not far to understand when we see the breakup of those sectors in any major default. While the RBI clampdown on NBFCs prevented major failures(though the microfinance crisis in AP may yet lead to debt defaults and restructurings), textiles and metals do not seem to have changed their true colours during all this time. 

Hence, while investing in that next hot textile/metals stock, investors should remember that these stocks are more likely to default on their debt during crises, as the past historical record shows. This is even as compared to other cyclical industries like sugar, real estate etc which are perceived to be more risky but surprisingly do not figure in this. And while investors can still speculate on these stock's upside on getting good terms during CDR(aka GTL group/Kingfisher Airlines etc), it is a pure speculation in that case as opposed to an investment. Creative bank accounting like restructuring to avoid NPA classification may have led to that, but prime facie one should take note of these two sectors which seem value traps.

Fixed credit rating fee cap model for some issuers-is CARE heading for disaster?

CARE had issued a draft prospectus earlier this year(http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317804515879.pdf), and being a credit rating agency, I was sure that its prospectus would make interesting reading given the recent macroeconomic turnmoil in EU/USA etc. And I was not mistaken. It was interesting, but for another reason. Risk factor 7 reads as follows(emphasis added is mine alone)
As a part of our efforts to compete effectively, we have adopted a fixed fee cap model for certain clients for a particular duration of time. Once the fee cap is exhausted, we are, as part of our terms of engagement with such clients, restricted from charging them any additional fees for additional debt issuances or bank loans or facilities availed for the duration of the period agreed. If we are unable to negotiate fee caps with these clients at appropriate levels and if we exhaust the fee cap, we will be required to continue to perform our services in accordance with the terms agreed with such clients for no additional fees. If this occurs with a large number of clients, our business, results of operations and profitability could be adversely affected


The issuer pays model by itself has inherent conflicts of interest, which competition would address to some extent, by ensuring a check on quality. But such an agreement implies exclusivity and tie in, because no issuer will rationally use different credit rating agencies, when it can get a 'free' rating from CARE once its limit is exhausted. Yes, CARE may get pissed but it can't even tinker with the rating to get even! There may be a tendency to cut corners by using the earlier work as the basis to rubberstamp opinions for fresh issues. After all, given the option of working on new mandates versus working on no-extra-fee mandates of the client when cap is crossed, which one would YOU prefer? the client would not care less, but users of the rating would. One can only hope that SEBI Code of Conduct is applied in letter and spirit, to ensure that fees do not affect the quality if miscalculated wrongly.
Update
Discussions with those in the industry inform me that this is now a standard practice, especially for frequent issuers. So maybe I was too harsh on CARE.