Rating downgrades on the rise

Last 2 months have not seen even a single upgrade.

Reflecting the downturn in the economy, there has been a sharp increase in credit rating downgrades in the last two months.

According to data collected from three credit rating agencies – Crisil, Icra and Care – there has been no upgrades in the last two months, while the number of downgrades has gone up.
 

April-September 2008
	Crisil	Icra	Care
Upgrade	1	4	7
Downgrade	3	11	10
April-November 2008 Upgrade	1	4	7
Downgrade	15	23	14
* April-December 2, 2008 for Crisil
All ratings for Icra, long-term ratings for Crisil and Care                                                                  (Source: Rating agencies)

“The environment will deteriorate further. In the next 12-18 months, we expect that downgrades will be more than upgrades,” said Crisil Managing Director & CEO Roopa Kudva.

Icra Managing Director Naresh Thakkar said that he did not see any improvement in the next six to nine months.

Care Deputy Managing Director D R Dogra said in the third quarter alone, as companies report poorer financial performance, downgrades would rise further.

Thakkar said, post-October, the outlook had changed due to the slowdown in the global economy.

While rating agencies have increased surveillance in the last few months, Dogra added that higher number of companies being rated this year may skew the picture.

Even the ratios present a similar story. For instance, in case of Care, the ratio of upgrades to downgrades was estimated at 0.50 for April-November 2008, compared with 0.71 for the corresponding period last year and 0.70 for the first half of 2008-09.

Crisil’s modified credit ratings (MCR) – with the ratio of upgrades and retentions and downgrades and retentions – too fell to 0.98 at the end of September. It fell below 1 at the end of September 2007 and dropped further to 0.97 at the end of March this year. The Crisil MCR had hit a record low of 0.61 in 1998-99 following the Asian crisis.

For Icra, the ratio of downgrades to upgrades touched 2.75 at the end of the first half of 2008-09, compared with 1.50 during the corresponding period last year.

“The ratings highlight the declining credit quality and, going forward, the key determinants will be the availability and cost of funding, the extent of demand slowdown, both domestic and export demand, and the value of the rupee,” Kudva said.

Thakkar said that while liquidity in the system has improved, real estate players and non-banking finance companies (NBFCs) continued to face problems. “Banks are also more careful due to a weakness in the operating environment,” he said.

Kudva added textiles and information technology to the list. In addition, she said that sectors such as power, telecom, FMCG, pharmaceuticals and healthcare – where demand tends to be less vulnerable to slowdown – were less affected.

Thakkar said the demand slowdown was also affecting sectors such as auto components, while the change in price volatility in the commodities space was affecting the metals sector.