Mumbai: In a clear indication that the economic slowdown is damaging the health of the country’s firms, local rating agencies are downgrading companies in large numbers.
In the just concluded fiscal 2008-09, four local rating agencies downgraded 229 companies and upgraded only 21. In other words, for each upgrade, there were about 11 downgrades.
A downgraded rating hampers a company’s ability to borrow and pushes the cost of money as investors’ risk perception for such companies goes up.
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The lists of downgrades by the four agencies are, however, not exclusive, and many companies feature in more than one list.
Crisil Ltd, the India arm of Standard and Poor’s, and Icra Ltd, an associate of Moody’s Investors Service, were more severe than the other two agencies when it came to downgrading companies.
Crisil downgraded 84 entities and upgraded only two. For Icra, the comparable figures are 61 and one.
Fitch Ratings Ltd appeared to be the most liberal among the local rating agencies. It downgraded 37 firms and upgraded nine. Credit Analysis and Research Ltd (CARE) downgraded 47 and upgraded nine.
A Crisil report released on Wednesday said of the 84 downgrades in 2009, 15 were from the automobile and auto parts industries, 14 from the financial sector, eight from textiles, and seven each from metals and mining, and construction and real estate.
Icra’s list showed that the maximum number of downgraded companies were from the automobile sector.
Unlike Crisil and Icra, most of the downgrades by CARE were in real estate, 10 of 47. It was followed by nine downgrades in textiles and five downgrades in steel.
“As many as 68 of the 84 downgrades were driven either by lack of access to adequate funding, or by a sharp decline in demand, or both,” Crisil said. “A slowing economy, and a sharp downturn in the investment environment, particularly during the second half of 2008-09, have affected Indian companies’ credit quality.”
In 2007-08, Crisil had downgraded 14 companies and upgraded nine. For the same period, Icra had downgraded 15 and upgraded 10. CARE and Fitch’s numbers for 2007-08 were not immediately available.
After three years with no defaults, Crisil’s rated portfolio registered as many as 13 defaults in 2008-09, although on a much larger base.
As on 31 March, Crisil had ratings outstanding on about 1,600 entities against 400 a year ago.
Crisil said its ratio of upgrades to downgrades reached a 10-year low in 2008-09 at 0.86 times, against 0.97 times for 2007-08. The previous low, at 0.61, was in 1998-99.
It said the intensity of the decline in the ratio between 2004-05 and 2008-09 is less severe than that of the decline between 1995-96 and 1998-99 because both manufacturing and financial sector entities have much stronger balance sheets this time around to support their credit quality.
According to Crisil managing director Roopa Kudva, 13.8% of Crisil’s long-term ratings had negative outlooks, the highest since the rating agency introduced rating outlooks in 2003.
“This indicates that continued economic deceleration can cause more downgrades over the next 12-18 months, unless the ongoing efforts to revive the global economy with fiscal and monetary measures start showing results,” Kudva said.
A similar sentiment was echoed by Icra’s managing director Naresh Takkar, who said the downward bias towards ratings will continue for some more time.
“Although the sharp deterioration in credit profile seems to have been stabilizing, we don’t see any recovery soon and the weakness should persist for some more time,” Takkar said.
CARE’s deputy managing director D.R. Dogra said most of the downgrades at his firm happened during the second half when the companies faced a severe liquidity crunch. The difficulties faced by the larger companies were passed on to smaller ones that were unable to cope with the pressure.
“Most of the downgrades happened because larger firms extended their payment schedule to smaller firms. These smaller firms faced severe pressure as their inventory was at high cost and customers demanded lesser prices. They could not keep their finances in good shape,” Dogra said.
According to Crisil’s director of ratings Ajay Dwivedi, the defaults mainly happened because of a severe strain on companies’ working capital positions. Of the 13 defaults, seven were in the textile industry and three were suppliers to the real estate industry.
Graphics by Sandeep Bhatnagar / Mint