Coronavirus lockdown: Spike in negative ratings
The increase in coronavirus cases, the nation-wide lockdown and the consequent disruption in various businesses is adversely affecting the ratings of corporate India. Rating agencies are now coming up with a bleak outlook for financial services entities as well.
Crisil on Thursday said that rating actions — downgrades, downward revisions, cuts in the rating outlook or keeping a company under watch with negative implications — have spiked.
The agency reviewed 120 companies which have been affected by the situation in sectors such as airlines, hotels, tourism, malls, organised brick & mortar retail, multiplexes and restaurants.
Crisil said it has taken a rating action on 81 companies, while ratings on the remaining 39 have been retained at existing levels. The actions are largely driven by near-term challenges to liquidity, which could impact financial flexibility. Of these 81 firms, there was a downward revision in rating outlook in 40 companies, while 22 companies were downgraded. The rest were placed on rating watch with negative implications.
The rating agency added that these are largely small and mid-sized companies, and some large ones with leveraged balance sheets that are more vulnerable to a sharp slump in cash flows.
It, however, pointed out that the 39 companies could surmount the stress because of their liquidity status, unutilised bank lines and other external financial advantages. These companies are also not expected to face any liquidity issues when it comes to operating expenses and debt repayments in the near term.
This is, however, not the only disappointing news coming from the rating agencies.
Ratings agency Fitch has said coronavirus-related worries are likely to aggravate the difficulties for Indian banks,
and revised down the operating environment score for the critical sector by a notch. The score has been revised to “BB” from “BB+” earlier, the agency said, pointing out that the Covid-19 outbreak ups the worries for the sector, which is already reeling under weak business and consumer confidence.
The outlook on the score is “negative”, given the uncertainty surrounding the severity and duration of the pandemic, and the associated effects on India's banks of restrictions on economic activity, it said.
On Thursday, Icra came out with a negative outlook on financial services entities that include non-banks, brokerages and even the insurance industry.
In a detailed report on the sector, it said that non-banks largely cater to the self-employed borrower segment in the retail space where the cash flows are expected to be more volatile in the current situation.
It added that other non-bank (non-retail) exposures are to entities or SMEs with relatively moderate risk profiles, which accentuate their credit risk in the current scenario.
Further, most of these borrowers have limited funding avenues and don’t have banking relationships for their credit requirements.
“While all non-banks are facing significant headwinds because of the evolving situation, their ability to keep the asset quality under control would be the key differentiator. The typical March quarter pullback in asset quality, which is witnessed by most players, may not be visible in the fourth quarter of 2019-20 and dues are expected to remain elevated at least in the near term,” it added.
The rating agency warned that a deterioration in the asset quality could further affect the funds flow to the sector as bank credit to non-banks are already high and funding from other sources such as mutual funds and insurance are likely to be muted.