Indian corporate debt ratings are deteriorating at the fastest pace since 2010 amid a cash crunch created to buoy the rupee and a deepening economic slowdown.
Billionaire Anil Ambani’s Reliance Infrastructure Ltd., which holds 69 percent in a venture building a metro network in Mumbai, and Apollo Tyres Ltd., which plans India’s largest acquisition in North America, were among 478 companies that had their rankings cut in the last six months at Crisil Ltd., the local unit of Standard & Poor’s. Only 417 firms were upgraded, a ratio of 0.87 against downgrades that was the lowest since September 2010.
Corporate bond sales fell to a five-year low last quarter as the Reserve Bank of India boosted interest rates and curbed funding for banks to arrest a currency slide, even as economists predicted the slowest growth in a decade will worsen. The yield on five-year top-rated company notes rose 97 basis points in the first half of the fiscal year that started April 1 to 9.94 percent. Similar rates climbed 48 basis points to 5.28 percent in China.
“These are unsustainable times and companies are looking for ways to ease the pressure,” Ajeet Agarwal, finance director in New Delhi at Rural Electrification Corp., the No. 3 issuer of rupee bonds in 2013, said in an Oct. 8 interview. “Persistently high funding costs along with a slowdown in the economy are pressuring cash flows across industries.”
Downgrades will continue to outnumber upgrades in the “near term,” Crisil said in an Oct. 7 statement.
Yields on local corporate notes surged to the highest since the 2008 global credit crisis last quarter after the RBI boosted two rates at which it supplies cash to banks by 200 basis points in July, triggering a funding squeeze and boosting the risk of defaults. The five-year rate rose as high as 10.75 percent in August, according to data compiled by Bloomberg. It has declined since then as Governor Raghuram Rajan cut those rates by 125 basis points.
The jump in borrowing costs, combined with heightened rupee volatility, prompted banks from Goldman Sachs Group Inc. to Standard Chartered Plc to predict growth in Asia’s third-largest economy will slow from the last fiscal year’s 5 percent, which was the least in a decade. Goldman now sees a 4 percent gain in gross domestic product in the current period, while Standard Chartered predicts a 4.7 percent increase.
“As much as 86 percent of the downgrades were due to the demand slowdown and stretch in liquidity conditions,” Ramraj Pai, Mumbai-based president of ratings at Crisil, said in an interview on Oct. 8. “These problems, along with high interest rates, mean credit quality of corporates will remain weak.”
Indian businesses’ credit quality has declined to a five-year low after their total liabilities rose almost threefold since 2007-2008 and interest expenses rose 226 percent, the local unit of Fitch Ratings said last quarter.
Crisil cut its rating on Reliance Infrastructure’s (RELI) rupee bonds by one level to A+, or the fifth-highest investment grade, according to a statement dated Sept. 28 on its website.
“The rating revision reflects lower revenue visibility in its engineering, procurement and construction business coupled with higher than expected exposure to group companies,” the credit assessor said in the statement.
Reliance Infrastructure didn’t respond to an e-mail requesting comment on the downgrade. The company’s partners in the Mumbai metro venture include the Mumbai Metropolitan Region Development Authority and Veolia Transport RATP Asia.
Apollo Tyres was downgraded in June after announcing a plan to acquire U.S.-based Cooper Tire & Rubber Co. for $2.5 billion, almost five times the Indian company’s market value, and saying that it seeks to borrow the entire amount. The firm’s ranking was lowered by three levels to A.
The long-term rating on the bank loans of Redington India Ltd., the local distributor of Apple Inc.’s iPads and iPhones, was lowered to A+ from AA- in April. Muthoot Fincorp Ltd., a unit of the nation’s biggest lender against gold, was cut to A from A+ in August.
Cash at Indian companies may fall short of repayment obligations by a third in the year through March 2014, Crisil said in a report in July. Local businesses face 1.1 trillion rupees ($18 billion) in debt maturities this financial year, according to the credit assessor. Rising payment defaults will boost bad loans at Indian banks to 4.4 percent of total advances by March 31 from 3.3 percent 12 months earlier, it predicts.
The funds crunch engineered by the RBI pushed short-term corporate debt costs above 12 percent last quarter. Three-month commercial-paper yields were at 9.27 percent yesterday, up 85 basis points in the second half, data compiled by Bloomberg show. The 10-year (GIND10YR) sovereign yields climbed 97 basis points since June 30 to 8.41 percent. The rupee, which touched a record-low 68.845 per dollar in August, has rebounded since then to 61.18.
Bond risk for Indian companies is rising. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers has climbed 120 basis points from this year’s low in May to 339, according to data provider CMA.
With the pace of consumer-price gains staying close to 10 percent, India has little room to ease monetary policy and that means the pressure on corporate finances will continue, said Rupa Rege Nitsure, an economist in Mumbai at Bank of Baroda.
RBI Governor Rajan said last month countering inflation was his top policy priority. He raised the policy-setting repurchase rate by 25 basis points to 7.5 percent on Sept. 20. The gauge will be boosted to 8.5 percent by March, Goldman Sachs Group Inc. predicts.
“The inflation conditions are going to offer little respite to the economy and for policy makers to be dovish in the short term,” Nitsure said in an Oct. 8 phone interview. “The corporate sector’s difficulties are going to prevail. The threat of downgrades accelerating won’t recede in the short term.”
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