Corporate financials didn’t look pretty a year ago. Indian firms were visiting their banks’ restructuring cells to renegotiate their liabilities and ratings agencies were on a downgrading spree. The amount of debt these firms had piled on during the heady boom of last decade was starting to impair their cash flows, since money went into financing debt. It seemed India was nearing its Minsky moment, a point in the credit cycle named after economist Hyman Minsky when the market discovers the final Ponzi stage of a credit bubble.
With another earnings season around the corner, it’s safe to say firms have averted this moment. On Wednesday, local credit rating agency Crisil published an annual report that noted 210 rating downgrades for 2009-10, but 123 upgrades. For 2008-09, in contrast, Crisil, the largest local agency, had downgraded 84 and upgraded only two. A downgrade makes it harder for a firm to borrow.
Crisil also suggests a full turn in corporate creditability. Rating agencies track what they call a modified credit ratio, the proportion of upgrades to downgrades. This ratio had been declining annually four years in a row, reaching a 10-year low for 2008-09. It’s now back on the rise, meaning more companies are cleaning their balance sheets.
Companies are even starting to have more cash on hand. Last month, Citigroup said that 2009-10 would see free cash flows for Indian firms—the money left after capital expenditures—turning positive and even rising sharply for the next few years, after staying negative since 2007-08. This means firms will not just make investments— Asia is already seeing a boost in deal making—but also reduce debt.
Does that mean that India’s companies have learnt they shouldn’t leverage themselves too much? Crisil itself points at something more fragile: 426 firms still carry a “negative” outlook on their creditworthiness. And let’s not forget, government stimulus—hopefully temporary—aided the recovery.
But Indian business leaders surely want to avoid the havoc the global credit bubble has played on Western corporations. That means averting not just the final stage of the Minsky cycle, but also previous ones where companies have to rely on high debt to push growth. They have a genuine chance now to grow on more sustainable and stable factors.
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