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FM’s austerity move hurts corporate ratings

FM’s austerity drive to save investment-grade rating and keep his promise on reining in fiscal deficit, has led to an avalanche of corporate rating downgrades.

Updated: Mar 11, 2013, 03.48 PM IST
MUMBAI: Finance Minister P. Chidambaram's austerity drive to save the nation's investment grade rating by keeping his promise on fiscal deficit has led to acceleration in corporate rating downgrades as tight liquidity weakened the finances of over leveraged corporate India

Downgrades swelled in the October-February period as companies — with stalled projects and waiting for payments for services offered to the government — struggled to meet working-capital needs.

The squeeze has also raised borrowing costs for companies. In the five months to February, Crisil, the Indian unit of rating company Standard & Poor’s, downgraded 530 companies, thus raising their cost of funds. This is higher than the 484 downgrades in the first half of the fiscal. In comparison, for the entire fiscal 2012 there were just 492 downgrades.

Banks faced with rising bad loans have slammed the doors on small- and medium-sized companies — the worst-affected among the business community — as they attempted to protect their profitability.

“It (fiscal deficit) has given confidence, but it is also putting pressure on liquidity,” said PawanAgrawal, senior director, corporate and government ratings, Crisil. “You have not spent the way you were expected to, and that is hurting growth.”

Chidambaram has announced that the government will beat its fiscal-deficit target of 5.3% of gross domestic product (GDP) this fiscal, proving many sceptics wrong. This determined effort was after rating companies threatened to downgrade India to junk status if macroeconomic numbers deteriorated. Many doubted that he would be able to meet his upwardly revised target. But his cut of nearly Rs 1 lakh crore of plan expenses and delay in payments of subsidies and release of payment to contractors, have squeezed the liquidity in the system. The government’s balance with the RBI was estimated at nearly Rs 1 lakh crore as the government reined in spending.

That led to a situation where banks had to borrow almost a similar amount from the RBI’s liquidity adjustment facility. But the position has since improved. Even as it may improve, the cost of funding for companies is rising despite the RBI lowering rates and releasing more funds into the system through lowering of cash-reserve requirements. Threemonth commercial paper rates for even the highest-rated companies have risen to the highest level since June 2012, Bloomberg data show.

Housing Development Finance Corporation (HDFC), the nation’s largest mortgage lender, raised funds at 9.8% last month, up from 8.95% in December, it showed. Sugarmaker EID Parry paid 9.98% for two months, up from 8.44% in October.

Fertilisers firms, — for which the government subsidises supply — and construction and engineering firms are the worst affected due to the liquidity crunch. These are the companies which are also heavily indebted. Construction firm Jessop and Co, IVRCL, Atlanta Infra Assets, Domacls Engineering and Hindustan Construction are some of the companies, whose ratings were downgraded on the worsening liquidity position.

“The rating downgrade reflects the deterioration of JCL’s liquidity resulting in consistent over-utilisation of cash credit limit for more than 30 days; the deterioration in the liquidity is on account of stretch in receivables,’’ Crisil said after downgrading Jessop, an engineering firm that manufactures wagons. But the problem also lies with the companies that are heavily leveraged which are not able to cope with even slight tightening of liquidity. “Corporates are not able to manage the current liquidity situation due to their over leveraging,” said Atul Joshi, managing director and chief executive at India Ratings, a unit of Fitch. “There is pressure to sell off SPVs. The situation is different than in 2008-09. There was no leverage then. Now there’s over leverage,” he added.

Infrastructure companies such as Lanco Infratech., that builds roads and runs utilities, are finding it difficult to meet payments and plants are operating below their capacity for want of adequate fuel.

Debt of 12 holding companies of eight large corporate groups with high exposure to the infrastructure sector rose 30% annually from 2007-08 to 2011-12, noted the Financial Stability of Report of the RBI. “These corporate houses seem to be more vulnerable, compared with their counterparts in the same industry.”

Even as the near-term liquidity could worsen further with nearly Rs 70,000 crore of advance tax payments, prospects could brighten in a few months.
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