Red flag over corporate defaults

New trend points to weakening liquidity profile of companies

Defaults and restructuring of short-term debt in the past couple of months have raised concerns over companies’ liquidity situation in the current economic environment. According to market participants and rating agencies, there have also been sharp downgrades of short-term papers.

“There have been several sharp downgrades in commercial paper (CP) ratings and also some defaults recently. This is a new and a worrying trend though we have been highlighting the risks of such events in the past,” said Ramraj Pai, president, CRISIL Ratings. Short-term debt includes funds raised through CPs, non-convertible debentures (NCDs) and bank loans for tenors less than a year. These are rated by agencies. CPs are money market instruments issued by firms to raise funds for up to one year. Banks, insurance and mutual fund companies are major investors in these instruments.

A fortnight ago, the commercial papers of Glodyne Technoserve was downgraded from A1 to A2+ by ICRA. “The revised rating reflects weakening financial and liquidity profile of the company,” said ICRA in the rating update. According to market participants, the company defaulted on its CP obligation of Rs 20 crore. In July, Deccan Chronicle defaulted on short-term NCDs of Rs 200 crore. As a result, CARE Ratings slashed the company’s short-term debt rating from A1+ to D. “The revision in rating is due to default by the company on short term NCDs,” said CARE in the ratings update.

After a few days, the ratings agency suspended all ratings on the company’s loans and instruments, saying the company did not furnish the requisite information required for monitoring.

The rating on CPs of Jain Irrigation Systems was revised downwards from A2 to A4+ by CARE in June. CARE said the revision took into account the continuing strain on the company’s liquidity position due to a delay in receiving subsidy for its micro-irrigation systems division, resulting in high working capital utilisation levels. The firm’s short-term bank facilities were also downgraded from A2 to A4+. Short-term debt ratings of Hindustan Construction Co have been downgraded from the topmost A1+ to the lowest A4 in three revisions since October 2011. Its debt obligations that were referred to the corporate debt restructuring cell also includes CPs and short-term loans.

“In general, the CP market is a fairly high-rated market and investors play on the interest yield rather than the credit quality. But economic conditions have changed now and it is important for investors to look at more factors behind the instrument than just the rating,” said Pai.

“CRISIL always looks at the short-term rating of a company with a liquidity back-up which can be an unutilised bank facility or a specific plan to pay up dues in case of liquidity stress, which provides a much stronger protection to the investor.”