Total debt worth Rs 2,40,000 crore was downgraded by rating agency Crisil in the first six months of the current financial year, indicating the worsening credit quality pressures of highly leveraged corporates, Crisil has said.
As much as 90 per cent of this debt is owed by firms from either investment-linked or commodity sectors, Crisil said, adding that “they will remain under the pump till deleveraging” happens through asset sales. “On the other hand, firms in the metals, real estate and infrastructure space continue to face pressure because of high debt or a steep fall in product prices,” it said.
“Rating actions in the first half of the current fiscal show that credit quality pressures have intensified for highly leveraged firms (those with a debt to EBITDA ratio of more than 2.5 times), especially in the investment-linked and commodity sectors,” it said. The deterioration is reflected in the debt-weighted credit ratio (total debt on the balance sheets of firms upgraded versus downgraded), which declined to the lowest level in nearly three years to 0.27 time in the first half, against 0.62 time for the entire fiscal 2015.
A broad-based improvement in India Inc’s credit quality will hinge on successful deleveraging of stretched balance sheets, significant improvement in investment demand and commodity prices, extent of interest rate reduction, and the government’s ability to continue to push economic reforms.
In contrast, credit quality improved for firms dependent on consumption or export demand, as well as for those with low leverage. Overall credit ratio (number of firms upgraded versus downgraded) improved to 2.13 times in the first half against 1.68 times in fiscal 2015. In all, there were 981 upgrades to 460 downgrades.
Somasekhar Vemuri, senior director, Crisil Ratings, said: “Leverage emerged as a key differentiator of credit quality in the first half. Another critical factor was the extent of linkage firms had to investment cycle, consumption demand and commodity price movement.”
Around 80 per cent of the upgrades were of firms with low leverage (debt to EBITDA below 2.5 times) or from the consumption and export-oriented sectors such as packaged food, pharmaceuticals, agricultural products and readymade garments. Of late, there has also been sharper focus on the performance of credit rating agencies because of instances of sudden and sharp rating changes — specifically downgrades — in the higher-rated categories (‘A’ and above). “Such rating changes create credit cliffs, catch the markets by surprise, leave investors in the lurch, and severely constrain the ability of fund managers to handle their exposures,” it said.
The very low intensity of rating actions in Crisil’s portfolio of companies having ratings higher than ‘A-’ was evident in the first half. Of the 55 rating actions (30 upgrades and 25 downgrades) on 1,005 firms in these categories, barring one upgrade by two notches, all were just single-notch changes.
Crisil expects the credit ratio of its portfolio to remain high in the medium term —meaning upgrades will be more than downgrades. However, the debt-weighted credit ratio will remain below 1 time, since the stress in the investment-linked and commodity sectors is expected to continue.