Credit rating major Crisil said on Thursday that, for the first time in five years, it’s modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) for the first half of 2007-08 (FH08) has dropped below 1 time – to 0.94 times.
Crisil’s MCR is an important indicator of systemic credit quality, and therefore of underlying business fundamentals.
In FH08, Crisil’s MCR for long-term ratings reduced to less than 1 time (to 0.94 times) for the first time in five years, from a level of 1.16 times in FY05. The MCR for FH08 reflects one upgrade and seven downgrades in the rating agency?s long-term ratings. The last time downgrades outnumbered upgrades was in FY03, when an MCR of 0.98 was recorded. Largely the increasing risk appetite of corporate managements drove the downgrades during FH08.
Six of the seven downgrades during FH08 were due to acquisitions, or large debt-funded capacity expansions, marking a sharp reversal in the hitherto improving trend of corporate India’s credit quality, the rating agency said in a statement.
?Crisil believes that changes in managements’ attitude towards risk will continue to drive corporate India?s credit quality. Strong financials can support increasing leverage and vaulting interest costs only to a certain extent; beyond this, aggressive acquisitions or capacity expansions will impact the creditworthiness,? the rating agency explained.
Successfully managing growth and integrating acquired entities, and the funding pattern for acquisitions and capacity expansions, are the other major factors that will drive credit quality over the remainder of the financial year.
Crisil expects that corporate India may also face profitability pressures going forward, on account of high input costs.