• Rajasthan

    Cong 99
    BJP 73
    RLM 3
    OTH 24
  • Madhya Pradesh

    Cong 113
    BJP 110
    BSP 2
    OTH 5
  • Chhattisgarh

    Cong 68
    BJP 15
    JCC 7
    OTH 0
  • Telangana

    TRS-AIMIM 95
    TDP-Cong 21
    BJP 1
    OTH 2
  • Mizoram

    MNF 26
    Cong 5
    BJP 1
    OTH 8

* Total Tally Reflects Leads + Wins

Quantum of debt downgraded in FY16 at all-time high, says CRISIL

By: | Updated: April 5, 2016 2:59 AM

The extent of leverage of Indian companies, excluding financial firms, which saw credit downgrades by rating agency CRISIL rose to an all-time high of R3.8 lakh crore in fiscal 2015-16. This surpassed the previous peak of R3.3 lakh crore reported for FY13.

The extent of leverage of Indian companies, excluding financial firms, which saw credit downgrades by rating agency CRISIL rose to an all-time high of R3.8 lakh crore in fiscal 2015-16. This surpassed the previous peak of R3.3 lakh crore reported for FY13.

In line with the stress faced by the banking industry, the worsening credit quality of corporate India was reflected in the credit metrics compiled by the rating agency, especially for the second half of FY16.

During the period, at 755, as number of downgrades outpaced the number of upgrades (575), the credit ratio stood at 0.76, compared to 2.13 for H1FY16. Given the high value of debt downgraded, the debt-weighted credit ratio – measure of quantum or value of debt upgraded to downgraded – fell to a three-year low of 0.2.

265 companies or 35% of the downgraded firms with total debt of R53,000 crore, were lowered to “defualt” rating although a big chunk of the same was accounted by a single entity. For the whole of FY16 as well, the credit parameters weakened with the credit ratio and debt-weighted credit ratio falling to 1.29 and 0.31 compared to 1.68 and 0.62, respectively in FY15.

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Of the 755 downgrades nearly 60% were on account of weak business profile inclduing weak deamnd, strong competition, stretched working capital cycle or lower profitability. About 40% of downgrades were driven by weak financials mainly, liquidity and balance sheet related reasons.

As such, the downgraded universe fared worse in terms of multiple financial metrics. For instance, at 8% the set reported nearly half of the median return on capital employed (RoCE) posted by the upgraded universe. Similarly, their debt to EBITDA (or operating profit) ratio at 4.6 times also remained much inferior than the upgraded universe. Even in temrs of working capital cycle the stress was evident on the downgraded firms, having a median value of six-months of sales compared to four-months of sales by upgraded bunch.

In a review note on the change in ratings during the fiscal, CRISIL said that more than half of this downgraded debt belonged to metal sector that is reeling under the pressure of falling realisation and high debt while the second biggest chunk of downgrades, at about a quarter of this amount, belonged to the infrastructure sector noted the rating agency.

“Debt under stress at infrastructure and metal-linked firms is at a record level because there hasn’t been any meaningful deleveraging of balance sheets, and metal prices continue to be low.” said Somasekhar Vemuri, senior director, CRISIL Ratings.

CRISIL does not expect a sharp improvement in credit quality in the near term. Indebted firms in the investment and metal-linked sectors will continue to face considerable headwinds, while consumption-linked firms with low leverage will see some uptick in credit quality.

“The debt-weighted credit ratio will continue to languish below 1, which is expected to reflect in likely increase in weak assets of banks. The ratio can turnaround only if there is substantial deleveraging of stressed balance sheets through sale of non-core assets, or a sharp reversal in metal prices,”added the rating agency in a press note on Monday.

CRISIL executives said that the key reasons for this sharp decline was, a slow-down in rate of upgrades as benefits like lower commodity prices are already factored in financial performance of corporate India. At the same time a pick-up in pace of downgrades added to the fall in ratios.

Delayed availability of financial information from unlisted companies which at about 95% form a large chunk of the revisions resulted in worsening performance in H2FY16.

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