Icra downgrades McLeod to default in fourth rating action since April

Move follows recent delays in meeting debt obligations and comes on heels of firm's annual results and auditor's concerns on its ability to continue as a going concern

Rating agency Icra has downgraded McLeod Russel India's ratings on Rs 1,031 crore fund-based and non-fund based bank facilities to "default" or "D" category from B-/A4.

Icra said that the rating revision factored in McLeod's recent delays in meeting debt obligations.

The rating action - the fourth since April - comes close on the heels of McLeod's annual results and the concerns raised by auditor Deloitte Haskins & Sells LLP on the company's ability to continue as a going concern. 

According to Deloitte, the Williamson Magor Group company's liabilities exceeded assets by Rs 1,435.66 crore as on March 2019 and in the last financial year it was unable to discharge obligations for repayment of loans and settlement of other financial and non-financial liabilities including statutory liabilities.

Icra said that it had earlier highlighted the continued pressure on the liquidity profile of the company owing to high financial exposure to weak group companies, which was largely funded by short-term debt, thus exposing the company to significant refinancing risks. 

McLeod's financial exposure to weak group companies had increased from Rs 645 crore in FY2018 to Rs 1,745 crore in FY2019.

Icra said that though the company had received a majority of the proceeds from sale of some of the tea estates, delays in utilising such sale proceeds in debt reduction had resulted in significantly high leverage of the company and the sizeable debt repayment obligations were unlikely to be met from its operational cash flows.

In a bid to pare debt, McLeod had sold around 20 gardens in FY2019 and Q1FY2020.

Icra added that the pressure on core operating profitability persisted as depressed tea prices were not adequately compensating for the increase in wage costs, notwithstanding the cost reduction initiatives taken by the company.