Friday, March 7, 2008

Heavy Debts Affect Credit Rating of Corporate India

by Phillip Horton

Many Indian companies have been acquiring companies much bigger than their sizes and for this these companies have to borrow heavy loans. The heavy borrowings by the Indian companies for acquiring new companies have led to a drop in their credit rating or credit worthiness. The fall out of the drop in the company’s credit rating is that even if the Indian companies recorded a strong performance and the robust growth of the economy the number of downgrades as per the credit rating institutions has overtaken the number of upgrades for corporate India.

The credit rating agency ICRA in a statement released on Thursday said that the number of downgrades corporate India has earned went beyond the number of upgrades by the credit rating agency for the year 2007. This rating by the agency has turned around the trend of downgrades and upgrades of the previous two years. However riding on an upbeat business environment and the structural adjustments the appraised companies made every investment grade instrument did not go in the category of defaulters in the year 2007. This development helped in keeping up the curve recorded in the previous three years. The ICRA in its statement further said that even if the number of downgrades is greater than the upgrades it continues to have faith in the fact that the business sentiment will remain gentle. The confidence of the credit rating agency is there despite there was a reasonable drop in the credit ratings of the companies due to increased investment activities that also include acquisitions by corporate India.

The companies that come in contact with commodity cycles and global competition any weakening in the international economic scene is likely to cause some wearing down in their credit ratings. The erosion in the credit ratings of such companies is more likely in the face of the Indian rupee strengthening further and the levels of duty protection dropping. Companies that have considerable short term funding or currency disparities are likely to witness greater pressures. As far as the extent of the changes in the ratings of Indian companies is concerned, there are 63% companies that were upgraded faltered on their relevant rating categories in 2007. The figures of such companies for the earlier year had stood at around 67%. The ratio of downgraded companies that breached their rating category was 66% for 2007 compared 60% for the year 2006.

The rating downgrades for different industries took place in the commodity sector that includes sugar, chemicals and petrochemicals as well as the financial services sector, power and pharma industries. Half of the overall upgrades took place alone in the financial services sector and the balance being shared by industries such media, hotels, fashion accessories and chemicals. Around 45% downgrades in 2007 happened because of the deterioration of the capital structure after expansions that were mainly because of debt funding as well as a turn around of the concerned commodity cycle. The balance downgrades happened because of stress on income due to external or internal elements.

 

 

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