Coronavirus lockdown triggers higher downgrade pressures for India Inc

Over Rs 2.59 trillion worth of debt papers see downward rating in February

The Coronavirus-triggered lockdown is likely to lead to higher downgrade pressures for domestic corporates with over Rs 2.59 trillion worth of corporate debt papers already getting downgraded in February, a 15-fold jump compared to previous month’s quantum.

This is the highest amount of downgraded corporate debt papers in nine months. However, it could not be ascertained whether the Sebi data has adjusted for multiple downgrades of same security.

In recent months, downgrade pressure had shown signs of easing as value of such debt papers had slipped to 15-month low in January at Rs 17,129 crore, showed data from Securities and Exchange Board of India (Sebi).

Debt market participants say that while the Reserve Bank of India’s (RBI) Rs 3.74 trillion liquidity-enhancement will help good-quality corporates find avenues for refinancing, lower-quality bond issuers could see further rating downgrades as daily operations have been disrupted amid global lockdown to curb contagion of Coronavirus.

“Downgrade pressure will continue on companies and sectors which have seen their cash flows come to a halt due to disruptions in day-to-day operations. Stressed sectors could see credit profiles deteriorate further with more intensity due to the lockdown,” said a fund manager, requesting anonymity.

“Supply chain disruptions due to Coronavirus can impact credit quality of corporates," said a senior official at a rating agency, requesting anonymity.

According to rating analysts, while moratorium by banks on classifying accounts as non-performing assets and lower financing costs offered by banks will help corporates with cash flow mismatches, the revenue-related challenges will continue in the near-term.

Experts say that downgrade pressures will also limit the funding avenues for stressed companies from the debt markets.

In March, Crisil disclosed that it had taken rating action on 81 companies that belonged to sectors most affected by Coronavirus outbreak (note issued on March 21). The actions were taken after reviewing 120 corporates in sectors such as airlines, hotels, tourism, malls, organised brick & mortar retail, multiplexes and restaurants.

Near-term challenges to liquidity, which could impact financial flexibility of the companies, was cited as the reason for rating action.

As many as 22 companies were downgraded by Crisil, rating outlook was downgraded from stable to negative for 40 firms and 19 firms were put under negative rating watch.

According to sources, the Sebi has not yet given any direction to rating agencies to refrain from downgrading companies on their capital market debt borrowing, amid the Coronavirus outbreak. In absence of any special dispensation from Sebi, rating agencies will continue to be guided with principle that ‘one day, one rupee’ delay is to be flagged as default and accordingly a downgrade is warranted.

Further, the ‘D’ or default grade cannot be withdrawn for at least six months after being issued by a rating agency.