Search the Internet           Tips

Credit rating agencies 'suspend' more companies

NetScribes/Janaki Krishnan

The rating of debt instruments issued by corporates has been showing a rather worrisome trend in recent months: The number of suspensions is rising dramatically. To make matters worse, downgrades are exceeding upgrades, all of which points to an increase in the number of speculative grade instruments in the market.

From no suspensions in May 2000, the number of suspensions rose to eight in July and 21 in September. In September, out of the 161 instruments rated, 21 were suspended, 16 downgraded and 11 upgraded. Of the 164 instruments rated in August, 21 were upgraded, 18 downgraded and 11 suspended.

June was the worst month, with as many as 13 debt instruments downgraded and just two upgraded. In May, downgrades exceeded upgrades by 15 to 11.

Industry sources say that suspensions usually occur in cases where the instruments have already been in the speculative grade for some time. "If you look at the ratings of such instruments, they would have been in 'C' or 'B' categories for a long time," says a source.

This means that the number of instruments under speculative category has been on the rise in recent times. "It has to be understood that suspension is the culmination of a long period of doubtful repayment history of the corporate concerned," says a source. When a company starts defaulting on its repayment obligations, it is placed in the default category before being eventually suspended.

Officials at Credit Rating and Information Services India Ltd (CRISIL), however, say it's too early to press the panic button. "It does not necessarily mean that there is something wrong in the economy," says a Crisil official, adding that a link could, however, be found between the rate of GDP growth and rating trends.

Last year, CRISIL released a report linking the GDP growth rate to the growth in the manufacturing sector and ultimately to an outlook on individual companies' ratings which would extend to their instruments as well.

However, even in times of a healthy GDP growth, certain sectors may not be performing well. In such cases, ratings of instruments issued by companies in these sectors could reflect their solvency or ability to repay creditors.

"Ultimately, though, the upgrades and downgrades would depend on the parentage," says Rupa Kudwa, CRISIL's chief rating officer, pointing out that all companies in the same sector need not have similar ratings for their instruments.

In September, quite a few prominent companies have made it to the default rating. In fact, the number of defaults has gone up from 30 in May and 46 in July to 154 in September.

Industry sources say that most of the defaults have been happening in the NBFC (non-banking finance companies) sector, which is facing hard times due to their inability to mobilise funds and repay obligations.

Money

Market Impact

Tell us what you think of this report