A slowing economy and sharp downturn in the investment environment, particularly during the second half of the financial year 2008-09, have affected Indian companies? credit quality. The number of rating downgrades that Indian companies have been subjected to, when compared with upgrades, has touched a ten-year high. Also, after three good years, defaults have started to surface, says premier rating agency Crisil.
Crisil downgraded 84 entities in the financial year 2008-09, while upgrading only two; in contrast, there were 14 downgrades and nine upgrades in 2007-08. Additionally, after three years with no defaults, Crisil?s rated portfolio registered as many as 13 defaults in 2008-09, albeit on a much larger base: as on March 31, 2009. It had ratings outstanding on about 1,600 entities, up significantly from about 400 a year ago.
Roopa Kudva, managing director and CEO, Crisil said, ?The present trend of downgrades outnumbering upgrades began as far back as the financial year starting April 2007. Over the past six months, the pace of downgrades has clearly accelerated.? As many as 68 of the 84 downgrades were driven either by lack of access to adequate funding, or by a sharp decline in demand, or both, says the report.
Crisil?s modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) reached a ten-year low in 2008-09 at 0.86 times, declining from 0.97 for 2007-08. The previous low for Crisil?s MCR was in 1998-99, at 0.61 times. However, the intensity of the decline in MCR between 2004-05 and 2008-09 has been less severe than that of the decline between 1995-96 and 1998-99, says the report.
This is because entities in the manufacturing and financial sectors have much stronger balance sheets to support their credit quality this time around.
?Moreover, as on March 31, 2009, 13.8% of Crisil?s long-term ratings had negative outlooks, the highest since Crisil introduced rating outlooks in 2003. This indicates that continued economic deceleration can cause more downgrades over the next 12-18 months, unless the ongoing efforts to revive the global economy with fiscal and monetary measures start showing results,? Kudva said.
Of the 84 entities whose ratings were downgraded in 2008-09, 15 were from the automobile and automotive ancillaries industries, 14 from the financial sector, eight from the textiles industry, and seven each from the metals and mining industry and the construction and real estate industry.
Most entities that defaulted on their debt obligations in 2008-09 did so after facing a severe strain on their working capital positions, because of the economic slowdown. Of the 13 defaults in 2008-09, seven were in the textile industry, and three were suppliers to the real estate industry.
Crisil expects the severe credit quality pressure to continue in the textile and real estate industries; suppliers to the real estate industry are vulnerable to delayed payments and even write-offs, it said.