India Inc sees record rating downgrades

More on anvil if govt, RBI measures do not show results.

The economic downturn has hit the financial health of India Inc, with very few companies seeing rating upgrades.

The three biggest rating agencies — Crisil, Care and Icra — which between them have announced 86 rating changes during the fourth quarter, upgraded the papers of only one company. While Crisil upgraded one company and downgraded 48, Icra did not upgrade papers issued by any company, but downgraded 37. During January-March 2008, Icra had downgraded five companies, while upgrading four.

During the financial year 2008-09, Crisil upgraded just two companies, while 84 were downgraded. In contrast, there were 14 downgrades and nine upgrades in 2007-08, resulting in a near seven-fold growth in downgrades.

Similarly, Care said that it had upgraded nine companies in 2007-08 as well as in 2008-09, but downgrades went up from eight to 47.

Moreover, Crisil said after three years with no defaults, its rated portfolio registered 13 defaults in 2008-09. Also, as on March 31, 13.8 per cent of Crisil’s long-term ratings had negative outlook, the highest since the agency introduced outlooks in 2003.
 

RATING ACTION
	Crisil		Care
	07-08	08-09	07-08	08-09
Upgrade	9	2	9	9
Downgrade	14	84	8	47
(Source: Rating agencies)

But there is more bad news to come as the continued economic deceleration could cause more downgrades over the next 12 to 18 months if the policy measures announced by the government and the Reserve Bank of India do not show results, Crisil said in a statement on Wednesday.

Icra Vice-Chairman and Group Chief Executive Officer P K Choudhury pointed out that the downgrades would be related to a few sectors. “The export-oriented sectors, textiles, automobile and auto-ancillaries, as well as real estate would continue to see more downgrades,” he said.

Of the 84 entities downgraded by Crisil in 2008-09, 15 were from the automobile and auto ancillary industry, 14 from the financial sector, eight from the textiles industry, and seven each from the metals and mining industry and the construction and real estate industry.

“The business environment and the financial market are likely to remain uncertain in the coming months and the credit environment will remain challenging,” said Icra Managing Director naresh Thakkar. Though the liquidity in the system had improved, availability of large scale funds was not easy.

Thakkar said that upgrades could possibly take place due to a strong external event. For instance, if a weak entity was acquired by a stronger player, the weaker company’s credit rating would improve.

Care Deputy Managing Director D R Dogra said that most of the downgrades took place between October 2008 and March 2009. The defaults in the first half of the year were just 11, while that number rose to 36 in the second half.

For Crisil too, downgrades rose sharply in the second half of the financial year-ended March 31. The collapse of Lehman Brothers in September 2008 sapped liquidity in the global credit markets and led to a sharp downturn in demand across the world. It said that of the 84 downgrades during the year, 68 were driven by lack of access to adequate funding and a sharp decline in demand.

Crisil’s modified credit ratio (MCR), the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations, reached a 10-year low in 2008-09 at 0.86 times, declining from 0.97 times for 2007-08. The previous low for Crisil’s MCR was in 1998-99, at 0.61 times.

However, the intensity of the decline in MCR between 2004 and 2009 has been less severe than that of the decline between 1995 and 1999. The manufacturing and financial sector entities have much stronger balance sheets this time around to support their credit quality.