MUMBAI: As businesses struggle to resume operations after gradual relaxation of the nationwide lockdown, corporate debt is likely to increase, adding to the already stressed balance sheet. Top 500 debt-heavy private sector borrowers may see an additional ₹1.67 trillion of debt during FY21-22 due to covid-19 led disruptions, according to India Ratings and Research (Ind-Ra).
Tepid corporate capex, coupled with muted revenue, is likely to restrict credit growth in FY21, it said on Monday.
The rating agency added that the additional ₹1.67 trillion of debt is over and above the ₹2.54 trillion anticipated prior to the onset of pandemic, taking the cumulative quantum to ₹4.21 trillion. “This constitutes 6.63% of the total debt. Given that 11.57% of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21% of the outstanding quantum. Ind-Ra expects the corresponding credit cost to be 3.57% of the total debt," it said.
The agency believes that in a scenario, wherein funding markets continue to see high risk aversion, corporate stress could increase by ₹1.68 trillion, resulting in ₹5.89 trillion of the corporate debt (9.27% of the total debt) becoming stressed in FY21-FY22. The resultant credit cost could be higher at 4.82% of the outstanding book. Consequently, 20.84% of the outstanding debt could be under stress in the agency’s stress case scenario.
Although further revisions in the FY21 GDP growth expectations by itself may not lead to a change in Ind-Ra’s stress estimates, the risk of a significantly prolonged recovery in the economic activity through FY22 and a larger-than-anticipated dent on demand could even result in stresses surpassing the agency’s stress-case estimates. The spread of the pandemic, policy response and its impact on economic growth, and the actual buildup of stress could result in higher default rates and credit costs – in line with the peak levels experienced in the last decade.
India Ratings expects the ₹4.81 trillion fresh credit demand by the top 500 debt-heavy private sector corporates to emanate from a mix of receivable financing and a further drawdown of unutilised bank limits to shore up liquidity, meet cash flow shortfalls and fund various isolated pockets of capex spending – largely restricted to maintenance capex.
It cautions that as economic uncertainties continue to linger, lenders, despite adequate liquidity, are most likely to deploy their capital at the upper end of the credit curve with a shorter tenure.
Lenders may turn even more selective, weakening the resource mobilisation ability of lower rated issuers in the investment grade, including those rated in the ‘A’ and ‘BBB’ categories. “Consequently, these issuers are at the greatest risk of facing rating transitions in FY21, although the rating sensitivities for various higher rated corporates could also be tested," it added.