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Indian-companies-creditworthiness-takes-a-knock
si Team
Thursday, June 26, 2008
It is a universal truth that if any thing is blown out of proportions, it would go off. This philosophy now works aggressively in Indian companies. The rating agency ICRA says that Corporate India is currently witnessing a fall in its creditworthiness as the companies are borrowing heavily to acquire businesses several times their own size. As a result, the number of downgrades by rating agencies exceeded that of upgrades in 2007.

But, despite the downgrades, the agency continues to believe that the business environment remains benign, as presently there is a scaling up of investment activities.

However, the impending possibility of a deterioration in the global economic environment is viewed as a Sophocles’ sword hung over the head of Corporate India, as such a situation may cause some erosion in the credit metrics of the entities exposed to commodity cycles or international competition. Entities with significant short term funding or currency mismatches may also experience the same problem. Adding oil to the fire is a scenario where the Indian rupee strengthens further and duty protection levels decline.

Around 63 percent of the upgraded entities breached their respective rating categories in 2007. It was around 67 percent in the previous year. The proportion of downgraded entities breaching the rating category was 66 percent in 2007 as against 60 percent in 2006.

The weakening of the capital structure following large debt-funded expansions and reversal of the relevant commodity cycle caused around 45 percent of the downgrades in 2007. The remaining downgrades were on account of pressure on earnings because of internal or external factors. As for the upgrades, improved earnings, strengthened capital structure, and takeover by an entity with a stronger credit profile were the primary reasons.

The rating downgrades happened in the commodities (sugar, chemicals, and petrochemicals), financial services, power, and pharmaceutical sectors. Meanwhile, half of the upgrades happened in the financial services sector, with the remaining ones spread across the hotels, media, chemicals, and fashion accessories.

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