Rating downgrades, defaults soar as slowdown pinches

The economic downturn has started to reflect on the credit quality of Indian companies.
According to rating agency Crisil, 13 companies defaulted on loans in 2008-09, the highest since the late nineties. These are the first instances of defaults after a gap of three years.

The quantum of debt instruments/ facilities on which Crisil ratings have been downgraded to 'D' on the long-term scale or 'P5' on the short-term scale amounts to about Rs 3,200 crore, a Crisil relase said.

Ajay Dwivedi, director-ratings, Crisil, said companies that defaulted in 2008-09 faced a severe strain on their working capital due to the economic slowdown. “Of the 13 defaults in 2008-09, seven were in the textile industry, and three were suppliers to the real estate industry,” he said.

Crisil’s definition of defaults is stricter than banks. Unlike banks which count a loan as a default only if it is not paid for 90 days from the due date, Crisil counts a default even if the borrower misses one.

Crisil also downgraded ratings of 84 companies in 2008-09, the highest since 1998-99, while upgrading only two. In 2007-08, there were 14 downgrades and 9 upgrades.
Crisil’s rival Moody’s-owned Icra also separately said that it has downgraded ratings on a host of Indian companies. Naresh Takkar, managing director, Icra, told DNA Money, “The number of downgrades has increased sharply. The number of downgrades this year has been 61 compared with 15 last year. There has been one upgrade compared with 10 last year.”

Roopa Kudva, managing director and CEO, Crisil, said downgrades have outnumbered upgrades since April 2007. Companies with negative outlooks have also increased, she noted.

"Over the past six months, the pace of downgrades has clearly accelerated. Moreover, as on March 31, 2009, 13.8% of Crisil’s long-term ratings had negative outlooks, the highest since Crisil introduced rating outlooks in 2003,” Kudva said in a press release.
Kudva warned that continued economic deceleration can cause more downgrades over the next 12 to 18 months, unless the ongoing efforts to revive the global economy with fiscal and monetary measures start showing results.

Crisil expects the credit pressure on the textile and real estate sectors to continue especially in real estate, which is prone to delayed payments and write offs.
Real estate companies have been stuck with land banks and high debt. Banks are not lending to real estate companies except for construction purposes. Other avenues have also evaporated as equity markets have slowed, foreign money has become expensive and advance money from home buyers is difficult to come by as prices remain high.

Raman Uberoi, senior director, Crisil, said textile companies with a heavy exposure to the export sector have seen a slowdown in demand. “For some of these companies even a delay in payments by one or two customers has an impact. Also, if payments come in 120 days instead of 90 days its an issue,” Uberoi said adding that even a large company like Arvind Mills had to face a downgrade because of its high debt.