Debt-weighted credit ratio, or ratio of debt upgraded to that downgraded, at lowest level in three years
With the number of ‘default’ ratings having jumped 40% in 2015 over the previous year and no visible improvement in the number of credit downgrades, corporate India remains as stressed as ever.
CRISIL data shows there were close to 300 defaults in the first nine months of 2015, totalling a sum of Rs 25,895 crore. Data from Bloomberg shows three leading credit-rating agencies — CRISIL, ICRA and CARE — together lowered the credit grades of 642 listed and unlisted entities in 2015 of which about 210, or a third, were reduced to ‘Default’ status. In 2014, such demotions were fewer at 147 or about 22% of the total downgrades. Downward revisions on outlook last year jumped more than twice, to 168, over 2014. While the quantum of debt that has been accorded ‘Default’ status for the whole year is not immediately known, some number-crunching by India Ratings shows that an amount Rs 23,806 crore was classified as default; this was three times higher than the amount of Rs 9,035 crore that lenders lost in 2014.
With companies unable to grow their toplines meaningfully enough in a sluggish economy, cash flows have been crimped making it difficult for them to service their loan obligations. “The system at large has grown its way out of trouble in the past cycles which is not going to be possible this time around. The environment is not supportive of that. Currently, we are looking at a credit cycle that has to consolidate which may take much longer,” observes Bharat Iyer, MD & Head of Research at JP Morgan.
Pawan Agrawal, chief analytical officer, CRISIL Ratings, identifies two clear trends in credit quality that have emerged over the past one year. The debt-weighted credit ratio or the ratio of quantum of debt upgraded to that downgraded is at its lowest level in nearly three years. This is because some large corporates — whose fortunes are linked to commodity and investment cycles — or who are highly leveraged remain stressed.
However, what’s positive is that several mid-sized and smaller firms have seen an improvement in credit quality with upgrades higher than downgrades and the credit ratio touching a four-year high in the first half of fiscal 2015-16. “We expect that both these trends will hold true for most part of 2016,” Agarwal observes.
CRISIL had downgraded debt worth Rs 2.4 lakh crore in the six months to September with the the debt-weighted credit ratio for a set of 1,441 companies — for which ratings were altered — falling to 0.27 times.
For FY15, this ratio stood at 0.62 times. Indeed, rating agencies may be looking at a busy period in 2016 as companies struggle to make ends meet.
As JPMorgan’s Iyer points out, the de-leveraging cycle is taking longer in the absence of a revival in earnings and the inability of companies to raise equity. Which is why although the NPL cycle looks like it’s closer to the bottom, it could be some time away from turning. “Apart from sectors such as real estate, infrastructure and resources, there is also stress in the SMEs linked to these sectors,” Iyer points out.
Neelkanth Mishra , MD – equity research, Credit Suisse Securities, recently observed that the large gap between reported gross NPAs at 4.8% of system loans and the extent of problem loans estimated at 17.5% could be an overhang for banks. Mishra believes that in the next 12 to 18 months banks will be compelled to recognise some of these bad loans.
Bankers say that while stressed companies are focussed on improving cash flows and attempting to sell assets, their efforts haven’t yielded much. Smaller companies are in fact seeing their receivables pile up. Credit profiles of several top corporates took a beating in 2015; among these were those for BHEL, DLF, Lodha Developers, Tata Tele Services, Shree Renuka Sugars for whom the outlook was lowered to ‘Negative’. Downward revisions on outlook last year jumped more than twice to 168 over 2014. A negative outlook indicates there is material likelihood — at least one in three — of the rating being downgraded over the next 12 to 18 months though it doesn’t necessarily result in a rating downgrade.
The metals and mining was clearly the worst affected space given that almost a quarter of default ratings belonged to such entities. Amongst the bigger players, debt instruments worth about Rs 80,500 crore owned by Essar Steel and Bhushan Steel were lowered rated default by CARE in May and October respectively while SAIL, Tata Steel ,Vedanta Resources and JSW Steel also saw their credit outlook altered to ‘Negative’ by rating providers Moody’s and Fitch. Amongst the big corporate houses, Jaiprakash group and GMR group saw the highest number of rating demotions, for five and 11, entities in that order though GMR Infra the listed entity was again upgraded to BBB- rating within a day by CARE. About Rs 42,000 crore of debt instruments of JP group were given default status.