A hundred firms downgraded to ‘default’ status since April

By: | Updated: September 29, 2015 3:17 PM

Last week, Amtek Auto defaulted on Rs 800 crore of repayments to bondholders. Unfortunately, the rating agencies were slow to spot the deterioration in the firm’s business until it was too late.

Corporate growthIt’s unlikely the PSU will default but suddenly, there has been a spate of downgrades. (Reuters)

Last week, Amtek Auto defaulted on Rs 800 crore of repayments to bondholders. Unfortunately, the rating agencies were slow to spot the deterioration in the firm’s business until it was too late. In May, CARE Ratings had downgraded the long-term bank facilities and some non-convertible debentures debentures to AA- and, later, in early August, suspended ratings of Amtek’s debt instruments including short-term bank facilities. But given September 20 was the due date for repayments, the agency should have red-flagged the trouble much sooner. There was little solace for investors to hear the rating had been suspended because Amtek had not furnished it with information it had sought.

Other agencies too lowered ratings for Amtek — Brickwork Ratings downgraded some NCDs from “BWR A+” to “BWR C” while Crisil and Icra lowered the reference price of the bonds held by two JPMorgan schemes to 75%. But again, it was too late. Last week Crisil lowered the outlook for Bharat Heavy Electricals’ long-term bank facilities from “stable” to “negative”, citing slow project execution, stretched working capital and vulnerable profitability.

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BHEL’s receivables, it said, continue to be sizeable with around a fifth of the receivables due from private sector developers facing delays in implementation, besides shortfalls in project funding.

It’s unlikely the PSU will default but suddenly, there has been a spate of downgrades. Last week two of L&T’s road projects, some debt instruments of SREI Infra and one expressway project of GMR all saw lower creditworthiness.

So far this year debt ratings of at least 70 companies have been downgraded between the three main agencies, and nearly 100 companies — 20 listed and 76 unlisted — have been ascribed a “default” rating since April. Agencies say that at a time revenues are under pressure thanks to sluggish demand, a whole host of companies could be in trouble.

Bankers say smaller firms are weighed down by weak cash flows since their receivables are piling up. Long-term instruments of eight companies including those of Jaypee Infratech and Jaiprakash Power ventures were downgraded from investment grade BBB- and for at least four they were brought down by two notches. Jaiprakash Associates now carries a “D” or default rating.

In their defence, rating agencies, which have been criticised for not being proactive enough, say they take into account a host of factors while evaluating a company’s creditworthiness.

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Anjan Ghosh, chief rating officer, Icra, told FE, “Apart from financials, factors like management quality, group strengths , expansion strategy as well as overall business prospects are taken into account.”

Officials at other agencies claim they do review stressed companies frequently depending on related policy and company specific events.

JN Gupta, co-founder and MD of proxy advisory firm SES, feels the rating methodology, which primarily takes into account financial factors, including ability to service debt, should be supported by a governance rating. Gupta points out an inherent flaw in the business model. “A big chunk of the payments are received only after the company accepts the rating,” he said. Shriram Subramanian, founder and MD, InGovern Research Services, suggests a change in the payments mechanism between companies and rating agencies. “Rating agencies could consider taking upfront payments or retainer fees, much like consultants, instead of fees that are contingent on a company accepting their ratings,” Subramanian recommended. At the same time, experts point out lenders also need to be more discerning and look beyond credit ratings.

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An FE study shows that for 22 listed companies, including the likes of BHEL, Ipca Laboratories, Bank of India, Indian Overseas Bank and Bank of Maharashtra, the rating outlook has been revised to “negative” over a period of six months. According to Crisil, a negative outlook indicates that there is material likelihood — at least one in three — of the rating being downgraded over the medium term. Of the 11 metals producers that saw rating downgrades, seven are steel producers, of which four are now graded “D”. That more companies from the sector may witness credit downgrades is a given, say analysts, as they see most steel producers reporting negative operating cash flows in FY16. In the three months to June 2016, every second large to medium-sized steel producer reported a loss. At least 10 firms that have a market capitalisation of more than Rs 2,000 crore such as Vedanta, Hindalco, and Jindal Steel and Power have been demoted, although their ratings stayed at AA, AA- and AA-, respectively.

Indian companies reported their weakest report card in the last six years in FY15, with earnings seeing the steepest fall since the Lehman Brothers crisis and revenue growth at a decade low. One in every four companies in the BSE 500 universe reported a decline in its revenue — firms like ONGC, Reliance Industries, Cairn India and BHEL reported a revenue drop of anywhere between 8% and 23%. With aggregate revenues for the April-June quarter coming off by 2.45 % for a sample of 2,129 companies, things don’t seem to be looking up. The slowdown in topline growth was reflected in cash flows as well as the amount companies spent in building new capacities.

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