Cash crunch: Downgrades leave India Inc debt profile in a shambles

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Published: November 27, 2019 4:36 AM

The spate of downgrades has resulted in a large group of companies now paying higher interest rates on loans.

jeffries, tata motorsAn analysis by Jefferies revealed that of the cumulative debt of Rs 33 lakh crore (ex-financials), about 38% has a prime credit rating, 36% are rated ‘AA’, 11% rated ‘A’ and the remaining 14% are rated ‘BBB’ or below.

At 10 downgrades a day, 2019 will go down as the worst year ever for India Inc’s credit profile. Data from Bloomberg show there have been more than 3,300 downgrades this year, including those of Tata Motors, Yes Bank and Jain Irrigation. Of these, 472 firms have been assigned ‘default’ status.

The spate of downgrades has resulted in a large group of companies now paying higher interest rates on loans. With the economy slowing, chances of corporate earnings reviving meaningfully in the near term are slim.

An analysis by Jefferies revealed that of the cumulative debt of Rs 33 lakh crore (ex-financials), about 38% has a prime credit rating, 36% are rated ‘AA’, 11% rated ‘A’ and the remaining 14% are rated ‘BBB’ or below.

“Incidentally, the ‘A’ rated companies are those where we believe there is meaningful divergence based on the current interest coverage and debt serviceability ratio, and are prone to further rating downgrades,” analysts at the brokerage wrote.

For the study, Jefferies screened roughly 5,000+ firms listed on the BSE and then narrowed it down to 3,000+ after excluding companies that have already defaulted or cases where it didn’t have consistent data and non-financial firms. Importantly, the interest coverage ratio for this entire group fell to about 5.6 x in Q1FY20, the lowest in the last 14 quarters.

“When split by latest credit ratings, it’s the ‘AAA’ rated companies that have declined the most followed by the ‘AA’ rated ones, though the coverage ratio remains well elevated so it has caused little issue,” they wrote.

Ratings have been lowered for companies across sectors. In November, Moody’s downgraded the corporate family rating (CFR) of Macrotech Developers (MDL) to ‘Caa1’ from ‘B3’ and also the backed senior unsecured rating of the US dollar-denominated bonds issued by Lodha Developers. Earlier, in June CARE had placed a ‘CARE D’ rating for various instruments of Dewan Housing Finance Corporation (DHFL) on account of a delay in servicing of obligations with respect to some of the non-convertible debentures by DHFL due to prolonged liquidity stress.

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