Credit quality pressures intensify for highly leveraged firms in H1: CRISIL

Investment-linked firms and those from commodity sector are most fragile; asset sales are important to reduce debt hangover

Ratings agency CRISIL has said credit-quality pressures have intensified for highly-leveraged firms, especially in the investment-linked and commodity sectors, in the first half of this financial year. (Credit quality informs investors of credit worthiness, or risk of default.)

Companies with a debt-to-earnings before interest, tax, depreciation, and amortisation (Ebitda) ratio of more than 2.5 are considered highly leveraged.

The deterioration is reflected in the ratio of debt to weighted credit — the overall debt on the balance sheets of firms against the debt downgraded. In the April-to-September period, this ratio declined to 0.27, the lowest in about three years, against 0.62 for 2014-15.

CRISIL’s analysis showed in the first half of FY16, firms with lower leverage had seen an improvement. Credit quality also improved for companies dependent on consumption or export demand.

The overall credit ratio (the number of firms upgraded against those downgraded) improved to 2.13 in the first half of FY16, against 1.68 times 2014-15. In all, there were 981 upgrades and 460 downgrades, CRISIL said.

Somasekhar Vemuri, senior director, CRISIL Ratings, said, “Leverage emerged as a key differentiator of credit quality in the first half. Another critical factor was the extent of linkage firms had to the investment cycle, consumption demand, and commodity price movement.”

Around 80 per cent of the upgrades were of firms with low leverage (debt-Ebitda ratio of less then 2.5) or those from consumption and export-oriented sectors such as packaged food, pharmaceuticals, agricultural products, and readymade garments. On the other hand, firms in the metals, real estate and infrastructure segments continued to face pressure because of high debt or a steep fall in product prices.

Those downgraded account for overall debt of Rs 2,40,000 crore, of which 90 per cent is owed by firms from either investment-linked or commodity sectors. These would remain under pressure till de-leveraging was carried out through asset sales, CRISIL said. The low intensity of rating action in the portfolios of companies with ratings higher than ‘A-’ was evident in the April-to-September period. Of the 55 rating actions (30 upgrades and 25 downgrades) on 1,005 firms in these categories, all were single-notch changes, barring an upgrade by two notches.

CRISIL expects the credit ratio of its portfolio to remain high in the medium term —meaning there will be more upgrades than downgrades. But, the debt-weighted credit ratio will remain below one, as stress in the investment-linked and commodity sectors is expected to continue.

A broad-based improvement in India Inc’s credit quality would depend on a number of factors, including successful de-leveraging of stretched balance sheets and a significant improvement in investment demand and commodity prices, CRISIL said. The extent of interest rate reduction and the government’s ability to continue with economic reforms would also have a bearing, it added.