Rating agencies mark down 3,500 companies versus 1,800 upgrades, for a downgrades to upgrades ratio of 1.94.
At 10 a day, it’s been raining downgrades over the past year. Rating agencies have, between them, announced a staggering 3,500 downgrades in 2016-17, an all-time high. And at just over 1,800, the number of upgrades was the lowest since FY14, Bloomberg data show. After Lodha Developers, Reliance Communications and Tata Steel in January and IFCI and IDBI Bank in February, Tata Teleservices and Janalakshmi saw their ratings drop in March. The ratio of downgrades to upgrades of 1.52 in 2015-16 worsened to 1.94 in 2016-17.
Indeed, India’s twin balance sheet problem — non-performing assets (NPAs) with banks and over-leveraged companies — is going to be hard to resolve. The total stressed advances on banks’ books is a staggering `10 lakh crore. This includes gross NPAs and restructured assets. While banks have attempted to revive close to two dozen loss-making firms by converting loans into equity, that has not succeeded. Also, half the loan recasts attempted in the corporate debt restructuring cell valued at `1.2 lakh crore have failed; companies were unable to revive their businesses and turned defaulters.
Banks are trying to help companies by extending the loan tenure and at times offering a moratorium to help improve cash flows. But such cases are few and far between and in general corporate India’s debt profile seems to be worsening.
Over `7 lakh crore of debt is with companies that have had an interest cover (PBIT/interest) of less than one for 12 straight quarters. That’s roughly a fifth of all bank loans to industry.
As corporate India’s debt profile worsens, more banks are being downgraded. Central Bank’s poor financial performance — it reported a loss of `605.7 crore in Q3FY17 and gross NPAs rose to 14.14% — cost the lender dearly as its ratings fell by a notch. Other banks to be downgraded were Canara Bank, Bank of India and Syndicate Bank.
Given the economy is yet to regain momentum, some sectors could see more stress. In a recent report, India Ratings observed the finances of real estate developers continued to remain stretched due to elevated inventory and debt. “We estimate debt levels will further rise given the negative operating cash flows,” analysts at the agency noted.
The Economic Survey for 2015-16 noted that the stress in the banking and corporate sectors was “not just a small amount…but one of the highest degrees of stress in the world”. At its current level, India’s NPA ratio is higher than any other major emerging market (with the exception of Russia), higher even than the peak levels seen in Korea during the East Asian crisis, the survey noted.’
The infrastructure sector remains in trouble. Punj Lloyd and Kesoram Industries together owe lenders over Rs 12,000 crore — the interest cover at both companies has been less than one for 12 straight quarters now.
As Credit Suisse pointed out, more than a third of corporate loans remain on the books of chronically stressed companies. And at the end of the December 2016 quarter, 41% of the total borrowings belonged to companies with an interest coverage ratio of less than one. Unfortunately, these firms aren’t doing too well — their Ebitda or earnings before interest, tax, depreciation and amortisation fell 10% in Q3FY17.
Again, three ADAG Group companies — RPower, RInfra and RCom — have a gross debt of close to Rs 80,000 crore but each of them reported an Ebit (earnings before interest and tax) loss in the December 2016 quarter.
According to Credit Suisse, Adani Enterprises posted an Ebitda of Rs 557.3 crore in Q3FY17, which meant its interest cover ratio was barely one. As a result, one of its wholly owned subsidiaries — Adani Agrifresh — saw its ratings fall in March.
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Despite having sold some assets — cement and power plants — the Jaiprakash Group’s outstanding loans remain elevated at close to Rs 70,000 crore. Again, Lanco Infratech’s borrowings are high at over Rs 45,000 crore.