The 16-month long trend of more debt downgrades than upgrades was broken in January with rating agencies upgrading the debt of 138 companies while downgrading that of just 94. This, however, doesn’t necessarily reflect an improvement in the financial health of corporate India since it happened on the back of the number of downgrades falling and not the number of upgrades rising.
What’s also interesting is the fact that the preceding month, i.e. December 2016, had seen a big jump in the number of downgrades, probably indicating that
rating agencies had gone on an overdrive post-demonetisation.
“While the Reserve Bank of India (RBI) gave an additional 90 days to small borrowers to service their loans after demonetisation, there was no such window given to corporate borrowers. Hence, it’s not unlikely that some rating agencies might have indulged in pre-emptive strikes in November and December,” said the head of a corporate ratings agency.
Moreover, while the number of downgrades dropped in January, the month saw several marquee names like Lodha Developers, Reliance Communication and Tata Steel being downgraded. Interestingly, of these, only Lodha Developers was downgraded due to the after effects of demonetisation while the other two bearing the brunt of being overleveraged.
Attributing Lodha’s downgrade from B1 to B2 entirely to demonetisation, Moody’s said the country’s largest residential realtor’s sales will be under pressure for the next 12-18 months, leading to its Ebitda/interest outgo ratio to be below two. “The downgrade reflects our expectation that the operating environment for the Indian real estate sector will continue to remain weak post the demonetisation exercise that took place in November 2016,” Saranga Ranasinghe, assistant vice-president and analyst at Moody’s, said.
He added that the drop in interest rates and sops for affordable housing in the Union Budget are unlikely to help Lodha since it is focussed on luxury and mid-tier segments. Moody’s also noted that Lodha had about Rs 300 crore of cash at the end of FY16 against Rs 2,200 crore of debt that needs to be refinanced during CY17.
Moody’s also downgraded the corporate family rating and senior secured bond rating of Reliance Communication from B1 to B2 in January claiming that the intense competition in the sector will likely keep its Ebitda under pressure over the next 6-12 months. “The downgrade primarily reflects our expectation that RCOM’s leverage — as measured by consolidated debt /Ebitda — will remain above 7x over the next 6-9 months while the company pursues regulatory, shareholder and debt holder approvals for its announced restructuring, including the demerger of its wireless business and sale of its tower assets,” Annalisa Di Chiara, vice-president and senior credit officer at Moody’s, said.
“The downgrade primarily reflects our expectation that RCOM’s leverage — as measured by consolidated debt /Ebitda — will remain above 7x over the next 6-9 months while the company pursues regulatory, shareholder and debt holder approvals for its announced restructuring, including the demerger of its wireless business and sale of its tower assets,” Annalisa Di Chiara, vice-president and senior credit officer at Moody’s, said.
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Tata Steel’s long term bank facilities and non convertible debentures, similarly, were downgraded to AA stable from AA+ by Care Ratings due to the uncertainty around the company’s UK business. “The revision in the ratings of Tata Steel takes into account the continuing uncertainties relating to the disposal/restructuring of its stressed UK business, the moderate financial risk profile of the company as reflected in its high gearing and below average debt coverage indicators in the category as well as low visibility in the short to medium term of sustainability of margins achieved in recent past,” Care Ratings noted.