Stress building in A & BBB paper, say rating agencies

Amtek Auto might not be alone, as far as defaults are concerned. If rating agencies are to be believed, trouble is brewing in 'A' and 'BBB' rated paper in sectors flagged by regulators as 'high-risk'. There are problems in sectors in which leverage has increased, but this could be company-specific. Investors should consider groups that aren't deleveraging.

D Ravishankar, director, Brickwork Ratings, says: "Companies, mostly in the infrastructure segment, with large debt exposure, are seeing more downgrades. Most such cases are clustered in the 'BBB' category, the last in the investment grade. There is need for caution and deft handling, as the perceived risks are higher. Timely support to address liquidity mismatches will help avoid systemic risks."

Following the Rs 800-crore default by Amtek Auto, rating agencies have come under the scanner. These agencies are supposed to review ratings on a quarterly basis, after an initial rating is assigned for listed companies. Despite such a process being in place, agencies don't always downgrade on a quarterly basis, to avoid volatility. The chief of a rating agency says these entities do not upgrade or downgrade when economic conditions change, as they prefer to keep a buffer in case the company is able to tide over the change.

On August 7, CARE Ratings suspended its investment grade 'AA-' rating to Amtek, after the company didn't provide information for monitoring its credit worthiness. On May 27, CARE had downgraded Amtek's long-term bank facilities and debentures to 'AA-', citing a "decline in financial profile, marked by a drop in sales and profitability in the quarter ended March this year and risks related to aggressive pace of acquisitions made by the company in the recent past".

Brickwork Ratings followed suit. It cut the company's rating from 'A+' to 'C'. Such a sharp fall in the company's rating put investors such as JPMorgan in a spot. Subsequently, JPMorgan restricted redemptions from two of its schemes.

Typically, rating agencies downgrade a company if the ratio of its debt to the earnings before interest, tax, depreciation and amortisation exceeds three, but they steer clear of this if the companies service their debt obligations. Such calls are taken on the basis of the company's prospects. As the recent rate of defaults suggest, such assumptions are clearly misplaced.

Giving a fair rating becomes difficult when companies stop disclosing information. Under these circumstances, agencies merely suspend the ratings. In June, Fitch Ratings withdrew its rating on Essar Projects' long-term foreign currency issuer default rating (IDR) of 'B-' and short-term IDR of 'B', as the company had stopped participating in the rating process.

Of late, several companies have been downgraded by agencies. In July, CARE Ratings downgraded Jaiprakash Associates by six notches - from a rating of 'BB' to 'D-', which reflects a default in the debt security. The rating of non-convertible debentures of Bhushan Steel was also cut by six notches, following a revision by CARE Ratings in December 2014. Punj Lloyd saw a similar drop in ratings in July.

Stress is beginning to show in 'A' and 'BBB' rated paper, in which downgrades are being recorded. Some agencies say the onus to spot discrepancies is on investors, too. Atul Joshi, managing director and chief executive of India Ratings & Research, says, "At the time of placement, we need to see the yield at which the investor picked up the paper, against its implied yield. If there was a difference, the investor did not buy into the rating. We should also question why corporates stop giving information to rating agencies."