Credit Rating Agencies Report Increased Debt Downgrades In April-June Quarter

After a few months of stability, the pace of debt downgrades increased once again in the April-June quarter, shows data from two domestic credit rating agencies.

The downgrades spanned a range of firms, such as non-bank lenders which continued to face liquidity stress and corporations who have found it difficult to refinance borrowings due to stress in the domestic debt markets.

Data provided by rating agency ICRA Ltd. shows that the debt-weighted credit ratio, which reflects the total volume of debt upgraded versus the debt downgraded during the period, slipped to 0.1 in the April-June quarter compared to 0.3 in the previous quarter. This ratio slipped back to the same level seen in the October-December 2018 quarter.

A debt-weighted credit ratio of less than 1 shows that more debt was downgraded than what was upgraded. The higher pace of downgrades compared to upgrades has now persisted for three consecutive quarters, shows data from ICRA.

ICRA's entity-weighted credit ratio, which reflects the number of companies upgraded compared to those downgraded, also fell below 1 in the April-June period.

CARE Ratings, which reports a ‘Modified Credit Ratio', measures the ratio of upgrades and reaffirmations to downgrades and reaffirmations. The data is not strictly comparable with the one put out by ICRA.

In a July 8 press release, CARE Ratings said this modified credit ratio had slipped a six-year low of 0.8. This too reflects an increased pace of downgrades compared to upgrades. A year ago, the modified credit ratio stood at 1.02, indicating more upgrades than downgrades.

According to the rating agency, downgrades have picked up across categories but are more pronounced in smaller enterprises and firms which were already rated below investment grade.

Across the 28 sectors, included in the study, only four had a modified credit ratio of more than one. This includes information technology, cement, electricity generation, electricity transmission and distribution and healthcare.

In a separate study, Goldman Sachs found that 60 companies within the BSE 500 Index saw their credit rating downgraded since the start of calendar year 2019, compared to the 41 companies which have seen upgrades.

This is the first time since 2015 that the number of downgrades have outpaced upgrades, the brokerage house said.

The report added that financial companies accounted for 42 percent of downgraded entities in 2019, followed by industrial companies which accounted for 13 percent of downgraded entities.