Declining profitability and stretch in working capital cycles also were reasons for the downgrades.
Mumbai: Amidst slowing economic growth, the number of rating downgrades in the just concluded half-fiscal has risen and bulk of the downgrades were largely from the financial sector, rating agencies said. According to Crisil, the value of debt downgraded has more than trebled to Rs 1.38 lakh crore in the first half of fiscal 2020, ended September 2019 from Rs 39,000 crore in the first half of fiscal 2019. That’s the highest for any half since fiscal 2016. On the same lines, rating agency Icra said that the value of debt downgraded by it was at Rs 5.2 lakh crore in H1 FY2020, which was patently higher than the figure of Rs 3.2 lakh crore for the full year FY2019.
“To a large extent, the sharp increase was attributable to the downgrade in debt of select financial sector entities, including housing finance companies, non-banking finance companies and private sector banks. That said, the debt of even non-financial sector entities experienced a substantial increase in downgrades contributed by select entities in the power sector, construction sector, besides automobile OEMs,” Icra said.
Icra has downgraded the ratings of 266 entities reflecting a downgrade rate of 14.6 per cent annualised which was significantly higher than the past five-year average of 8.8 per cent. At the same time, instances of upgrades, at 170, witnessed a decline, as did the upgrade rate of 9.4 per cent annualised which was relatively lower than the past five-year average of 10.2 per cent. Also, there was a marked increase in the proportion of ‘fallen angels’ i.e. the percentage of investment grade entities downgraded to the non-investment grade. In H1 FY2020, this proportion rose to 7.7 per cent annualised, the highest since FY2013. However the overall default rates softened to 2.5 per cent annualized in H1 FY2020 in comparison with the past five-year average of 3 per cent even as credit quality pressures endured, and instances of downgrades increased according to Icra.
Crisil said that the global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending intensified the credit quality pressures. Somasekhar Vemuri, Senior Director, Crisil Ratings, said, “Entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades. Those with lower leverage withstood the demand-side challenges better. Over the past five fiscals, the median gearing for Crisil-rated companies has improved from 1.3 times to 0.9 times. This reflected both, deleveraging that’s been underway and resilience to demand pressure.”