Corporate Downgrades More Than Double In First Three Quarters, Says India Ratings

In line with the massive 240 basis points downward revision in growth forecast, the credit profile of companies has also sharply deteriorated in the first three quarters, with the downgrades-to-upgrades ratio more than doubling to 1.82, according to an India Ratings report.

The year also witnessed the quarterly downgrades-to-upgrades ratios jumping to 1.59, 2.03 and 2.75, respectively for the nine months, as the severity of slowdown were factored into ratings, India Ratings said in a report on Monday.

In an unprecedented fifth downward revision of its gross domestic product forecasts for a year, the agency has sharply revised down its forecast to a low 5 percent from 7.5 percent, which also sharply increased corporate rating downgrades during this period, it added.

"The deepening slowdown reduced the number of upgrades. Consequently our downgrades-upgrades ratio moved up to 1.832 till December from 0.86. During the period, we downgraded 188 issuers, while upgrades were only 103, making it one of the highest in recent years," it said.

Downgrades amounted to Rs 1.53 lakh crore of the rated debt compared to upgrades of Rs 49,600 crore, and downgrades were led by some debt-heavy financial sector issuers -- 45 percent by value and 6 percent by volume, as per the report.

"The extent of the sharp and sudden changes to macroeconomic parameters resulted in higher-than-expected deterioration in the credit profiles of leveraged entities across sectors. Not only did the downgrades-to-upgrades ratio increase to one of the highest levels, the ratio also rose with every passing quarter, as GDP kept heading south," the report noted. This has ratings volatility shooting up to 30 percent in the first three quarters from 24 percent.

Defaults rose to significantly higher level of 4.9 percent of all issuers, from 2.9 percent last year, as liquidity remained elusive for low-rated companies. "Credit profiles were impacted from a sharp drop in private consumption, continuing low investments and increasing working capital intensity and the resultant drop in profitability - the main reasons for rating downgrades in over half the cases," the report said, adding that working capital pressure was more prominent where states were counterparts or issuers faced export slowdown.

Downgrades were more pronounced in small to medium capital goods companies, renewable energy players and food, beverages & tobacco companies. Capital goods faced multiple headwinds like slower order book growth, lower profitability and increasing working capital pressures.

In the financial sector, housing finance companies and non-banking financial corporations continued to face funding challenges, accentuated by defaults from a couple of large issuers. On the outlook, it says any improvement is offset by the lingering credit pressure as risk aversion still continued to limit transmission to the borrowing sectors even though liquidity within the banking system is fairly comfortable.

"At the end of December 2019, as much as 13 percent of the ratings against 6 percent last year were on a negative outlook or on rating watch negative, indicating that the pressure on corporate credits to persist for at least the next two to three quarters," it concluded.