India Inc sees rise in credit quality pressure

India Inc sees rise in credit quality pressure

Credit quality pressure on investment grade entities has risen in the six months of April-September 2018, with an increase in the downward rating pressure on them, according to ratings firm Icra.

By: FE Bureau | Mumbai | Updated: October 2, 2018 4:48 AM

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Credit quality pressure on investment grade entities has risen in the six months of April-September 2018, with an increase in the downward rating pressure on them, according to ratings firm Icra. This is also reflected in the rating drift of investment grade entities turning negative for the first time in four years, in the first half of financial year 2018-2019, as also the rise in the downgrade rate of investment grade entities.

In a note, Icra said the rating drift of investment grade entities deteriorated to -5.1% in H1FY19 (3.2% in FY18) against the past five-year average of 4.3%.

Also, the downgrade rate of investment grade entities rose to 8.3% (annualised) in H1FY2019 (7.1% in FY2018), a five-year high.

Rating drift is measured as the average upgraded notches per rated entity, minus the average downgraded notches per rated entity, while downgrade rate is measured as the number of entities downgraded to the number of entities whose ratings were outstanding at the beginning of the measurement period.

Sectors like financial services, power, public-sector banks and aviation have been the largest contributors to the volume of the debt downgraded in H1FY19, the ratings firm noted.

Last month, Icra downgraded Jet Airways’ long-term ratings for certain fund and non-fund based facilities from BB plus to BB. The ratings were downgraded considering the continued deterioration in the operating and financial performance of the company because of its inability to pass on the increase in jet fuel prices to the customers. The company’s short-term ratings on non-fund based facilities were also moved down to A4 from A4 plus.

Rating actions have been seen in power companies too. For instance, Care revised the rating of structured non-convertible debentures of IL&FS Energy Development Company Limited (IEDCL) to CARE AA plus;/CARE A1 plus (credit watch with negative implications) from CARE AAA; Stable/CARE A1 plus, factoring in the moderation in the credit profile of the credit enhancement provider that is Infrastructure Leasing & Financial Services (IL&FS).

Among financial services, crisis-hit IL&FS Financial Services witnessed a sharp downgrade in its ratings by several notches from rating agencies. Icra downgraded a Rs 4,000-crore commercial paper of the company from A4 to default rating D.

Meanwhile, CARE downgraded Rs 12,775 crore of the companies financial instruments to D rating. Commenting on the credit quality trends, Anjan Ghosh, chief rating officer, Icra, said: “While the overall pace of the downward rating drift of Icra-assigned ratings in H1FY2019 remained broadly similar to that seen in FY2018, the credit quality pressures on investment grade entities intensified. Nevertheless, default rates did not increase in H1 FY2019, contrary to Icra’s forecast at the beginning of the fiscal.”

There has also been a sharp increase in the total volume of debt upgraded. Jitin Makkar, head (credit policy), Icra, said, “Icra upgraded total debt of Rs 3.3 trillion in H1FY19, significantly higher than the total debt of Rs 1.8 trillion upgraded in the full year FY18. This was driven primarily by the improvement in credit quality of a select few entities — 5% of entities accounted for 80% of the total volume of debt upgraded — that accounted for a relatively large proportion of debt at a systemic level.”

The sectors that saw an improvement in the credit quality of participants were ferrous metals, microfinance institutions and fertilisers. Select sectors where the credit quality worsened were textiles, roads, real estate, automobile dealerships, education and financial services.

Meanwhile, in a completely opposite view, Crisil Ratings in its report for H1FY19 said India Inc’s credit quality was resilient in the first half of fiscal 2019.

Crisil’s credit ratio (or number of upgrades to downgrades) stood at 1.68 times in the first half of fiscal 2019, compared with 1.88 times and 1.45 times in the first and second halves of fiscal 2018, respectively. There were 685 upgrades to 408 downgrades in the first half of fiscal 2019, Crisil said.

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