Profits, credit quality of firms in India recovering 6 months faster: S&P

Profits and credit quality of firms rated by S&P Global Ratings in India, China and Pacific are recovering about six months faster than the agency anticipated with reducing downside risk to ratings

Profits and credit quality of companies rated by S & P Global Ratings in India, China and Pacific are recovering about six months faster than the agency anticipated with reducing downside risk to ratings.

Indonesian companies, on the other hand, are unlikely to recover until the second half of 2022, said the report titled 'Asia Pacific Corporate and Infrastructure Credit Outlook 2021' which covers entities in India, China, Japan, Indonesia, Australia and New Zealand.

The report discusses the pace at which corporate sector in these countries is likely to recover from Covid-19 pandemic. It also includes a list of credit trends on the radar of S & P Global Ratings analysts in 2021, including demand recovery, funding conditions and financial discipline.

"Significant downside risk persists for the credit quality of Asian companies with negative rating outlooks on nearly 25 per cent of investment-grade and about one-third of speculative grade companies we rate in region," said S & P Global Ratings credit analyst Xavier Jean.

Issuers rated BBB-minus and above are investment grade and those at BB-plus and below are speculative grade. While the proportion of ratings on negative outlook is broadly stable compared with six months ago, the report points to growing recovery differentiation across the region.

Lingering refinancing risk exists for weaker Indonesian companies in the commodities, real estate, transportation, retailing, and state-owned sectors, said Jean.

The pace of rating downgrades has slowed over the past three months under S & P Global Ratings assumption of a gradual recovery of key macroeconomic indicators and profits for companies rated in Asia Pacific in 2021.

"We project better profits and credit metrics for nearly nine out of 10 rated companies in Asia Pacific in 2021 over 2020. Nearly 40 per cent of credit ratings or outlooks can face renewed downside risk if profits stall in 2021 and the recovery is postponed by another year," said Jean.

Braking profit growth will likely trigger the most downside risk for investment-grade issuers in China, Japan, and Australia operating in the commodities, real estate, automobile and machinery, and transportation sectors, and for issuers in the B rating category facing refinancing risk.

Access to funding is likely to remain a major credit differentiator in Asia Pacific throughout 2021, said the report. Some funding green shoots are appearing for smaller, more leveraged issuers, notably in China and Indonesia -- albeit at a much higher cost and sometimes shorter tenors.

The fund-raising window can be short-lived, however. Investors are likely to stay edgy until they have more confidence in the sustainability of profit recovery post vaccine roll-out.

Funding from domestic banks is also likely to remain selective throughout the region as debt moratoria have ended or are set to end in Malaysia, China, Thailand, Indonesia or India through 2022, said the report.