The economy is nowhere near out of the doldrums yet, if corporate ratings are any indication. The markets may have stabilised somewhat, but companies are still struggling to recover from the financial market meltdown last year that took down many a boat.
Small wonder, corporate downgrades still outnumber upgrades by several times.
For one, rating agency Crisil, which is backed by Standard & Poor’s, has made 90 downgrades and 13 upgrades since April 2009, compared with two downgrades and just one upgrade during the corresponding period in 2008.
Roopa Kudva, managing director and CEO, Crisil attributed the higher downgrade count to continuing “economic challenges such as demand slowdown, lack of pick-up in both exports and the domestic sectors and also as cost of money has increased and credit availability has declined.”
The trend seems set to last a while. Naresh Takkar, managing director of Moody’s-backed ICRA, said downgrades will continue, though this time it will be more due to technical reasons such as a company delaying a loan repayment by even a couple of days.
This is a change from last year when companies were being downgraded for lack of refinance ability, losses in derivatives and slowdown in profits, Takkar said, adding, the situation is stabilising, though some sectors, particularly the export-dependent ones, may continue to face headwinds.
“Also, as we are increasing our base of companies, there will be a lot of lower-rated entities in the list, which have a higher risk of default,” he said.
ICRA’s rating universe has about 1,400 companies, as compared with Crisil’s 2,500. And the numbers are fast increasing as more companies come forward to get themselves rated.
“In January 2008, we used to rate 400-450 companies, but today we rate about 2,500, so the increase in downgrades should be seen in that context,” said Crisil’s Kudva.
A definite spur in this regard has come from the implementation of the Basel II norms by banks.
“Earlier, any rating below AA was not acceptable for companies because there was no appetite for their bonds. Now, because of this Basel II compulsion, we have companies rated AAA right down till B. It helps banks price loans better,” said Kudva. The increase in debt market issuances by companies is also a factor.
“Companies issued debt because commercial paper rates were attractive and we benefited from that. Companies are also inclined to get themselves rated because the risk weight for a rated company is lower, which means banks can offer them loans at lower rates,” said Takkar.
This has meant bigger fee revenues for rating agencies and helped them post handsome numbers for the first quarter. Crisil earned revenues of Rs 60.8 crore from its core rating services in April-June, up 31% year on year. However, overall net profit growth was lower at 12%, as other businesses such as advisory services and other income proved a drag.
ICRA, on the other hand, earned Rs 20.09 crore from its rating business in the same period, up 28% year on year, but posted a 72% jump as all its businesses performed well.
Kudva said the implementation of Basel II norms in the last 6-9 months was the main driver for Crisil. Currently, every bank in India is required to be Basel-II compliant, which makes it mandatory to support the risk (of default) attached to loans by keeping aside capital.
This support — called risk weightage in banking terms — will depend on the rating of the company that has been given the loan. The higher the rating, the lesser the chances of loan default. The weightage varies from 20% (of the loan amount) for a highest-rated or ‘AAA’ company to 150% for the lowest-rated.
Earlier, banks had to keep aside a flat 100% on all corporate loans as ratings were not compulsory.
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