Credit quality of highly indebted firms worsens: CRISIL

Ratings firm CRISIL on Monday warned that credit quality pressures intensified for highly leveraged firms, especially in the investment-linked and commodity sectors, in the first half of the current fiscal year.

Credit quality, however, improved for companies dependent on consumption or export demand as well as for those with low leverage, CRISIL said in a report that analysed risk profiles and ratings of companies.

CRISIL, owned by Standard & Poor's, considers companies with a debt-to-EBITDA ratio of more than 2.5 times as highly leveraged. EBITDA is short for earnings before interest, tax, depreciation and amortization.

The firm said that the debt-weighted credit ratio for the April-September period stayed below 1, which has been the trend over the past four years. The ratio was at 0.27 times, indicating that debt facing downward pressures is nearly four times the debt witnessing credit quality uptick, it said.

However, CRISIL upgraded more companies than it downgraded during the period. It upgraded 981 companies and downgraded 460. The number of upgrades rose 14.3 per cent from a year earlier, more than the 12.6 per cent pace in the second half of 2014-15.

The overall credit ratio, which shows the number of firms upgraded versus downgraded, improved to 2.13 times in the first half of this fiscal year from 1.68 times in 2014-15.

"More than two-thirds of the upgrades were primarily due to business-related factors, such as healthy demand, improved operating efficiency, and scale-up in operations. Improved liquidity accounted for a quarter of upgrades, and balance sheet strengthening for 7 per cent," the ratings firm said.

The report also noted that, despite weak liquidity, there was a marginal drop in the downgrade rate to 6.7 per cent.

In terms of sector-wise classification, the report said that the real estate sector had as many downgrades as upgrades. The construction and engineering sector had five upgrades for every two downgrades.

CRISIL said that broad-based improvement in India Inc’s credit quality will hinge on companies reducing the debt levels on their stretched balance sheets, significant improvement in investment demand and commodity prices, extent of interest rate reduction, and the government's ability to continue to push economic reforms.

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