Upgrades Beating Downgrades by Narrowest Margin Since Crisis: India Credit By Anoop Agrawal - Jan 15, 2012

Indian companies’ ability to repay debt is deteriorating the most since the financial crisis that tapered in 2009 as the economy slows and the highest borrowing costs in three years erode profits.

Crisil Ltd. (CRISIL), the Indian unit of Standard & Poor’s, raised credit ratings on 13 companies for every 10 that it downgraded last quarter, the smallest number of upgrades to downgrades since the last three months of 2009, according to data compiled by Bloomberg. Ratings for five companies were lowered this month, while one was raised.

Average bond risk for Indian borrowers more than doubled in the past year as Asia’s third-largest economy expanded at the slowest pace since 2009 and the central bank lifted interest rates seven times to slow inflation. Five-year bond yields for AAA-rated companies have jumped 40 basis points since October to yield 100 basis points more than government bonds, while a similar spread in China (GCNY5YR) shrank 21 basis points to 156.

“We have scaled back corporate debt investments because of growing concerns over asset quality and the volatile market conditions,” D.K. Mehrotra, Mumbai-based chairman of Life Insurance Corp. of India, the nation’s biggest fund manager, said in an interview on Jan. 12. “Given the weak domestic and global economic conditions, attractive investment opportunities are going to be difficult to come by.”

Indian Prime Minister Manmohan Singh said on Jan. 8 that India’s gross domestic product will rise about 7 percent in the year ending March 31, less than the 7.5 percent rate of expansion he predicted in December. Growth in the $1.7 trillion economy slowed to 6.9 percent in the three months ended Sept. 30, according to the most recent government data.
‘Further Hurt’

Indian companies’ ability to meet interest payments has fallen to a five-year low because of shrinking earnings, rising borrowing costs and losses in the rupee, Mumbai-based Crisil said in a report published this month.

The Reserve Bank of India boosted the repurchase rate by a record 225 basis points, or 2.25 percentage points, in 2011 to 8.5 percent, the highest level since 2008. The rupee slid 12 percent in the past 12 months versus the dollar in Asia’s worst currency performance. It gained 0.1 percent to 51.53 per dollar on Jan. 13.

“Companies with substantial debt on their balance sheets will be further hurt by rising interest costs and marked-to- market losses on foreign debt and derivatives due to the depreciation of the rupee,” said Prasad Koparkar, Mumbai-based head of industry research at Crisil.
DLF Downgraded

DLF Ltd. (DLFU), INDIA’s largest property developer, was downgraded by Crisil on Dec. 27 after the company’s liabilities minus cash climbed to an all-time high of 242.7 billion rupees in the three months ended Sept. 30, data compiled by Bloomberg show. Nagpur, India-based Bajaj Steel Industries Ltd. (BJST) and textile manufacturer Himatsingka Seide Ltd. (HSS) had their rankings lowered last quarter.

Debt downgrades by Mumbai-based CARE Ratings Ltd. jumped to 169 during the nine months through December, from 84 a year earlier, D.R. Dogra, Managing Director at CARE said in a Jan. 10 e-mail.

Demand for corporate bonds is falling as the credit quality of companies worsens and analysts cut earnings forecasts.

State-owned Life Insurance Corp. bought 300 billion rupees ($5.8 billion) in company debt in the eight months through November, compared with 400 billion rupees invested a year earlier, according to chairman Mehrotra. Bond sales by Indian companies shrank 9 percent to 1.76 trillion rupees in 2011, according to data compiled by Bloomberg.
‘Whirlpool of Pessimism’

“Profitability will be stretched across industries because of high input and borrowing costs,” Vinita Singhania, managing director at New Delhi-based JK Lakshmi Cement Ltd., said in an interview on Jan. 11. “We expect the situation to persist this year and the outcome of these difficulties will be reflected in the performances of companies.”

Profits at the 30 firms that make up the benchmark BSE India Sensitive Index will fall 8.7 percent to 1,150 rupees a share in the 12 months through March, the biggest drop in three years, according to analyst estimates compiled by Bloomberg.

“India today finds itself in the middle of a whirlpool of pessimism,” analysts at Nomura Holdings Inc., including Mumbai- based Prabhat Avasthi, wrote in a research note dated Jan. 12. “Growth would continue to face headwinds. The lagged effects of past tightening are likely to continue to play out in the first half of 2012. The trajectory for earnings through the year would likely slow.”
Bond Risk

Yields on benchmark 10-year government bonds have climbed 56 basis points in the past two years as the Reserve Bank boosted interest rates. The extra yield demanded by investors to hold the notes over similar-dated U.S. Treasuries widened 177 basis points in the period to 632. The yield on the 8.79 percent note due November 2021 fell three basis points last week at 8.19 percent, according to the central bank’s trading system.

The average cost of credit-default swaps insuring against debt defaults by seven Indian issuers climbed 242 basis points in the past year to 452 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.
Bad Loans

India’s sovereign notes earned 7.6 percent in the past 12 months, while Indonesian securities returned 25 percent in the biggest gain among Asia’s 10 biggest government debt markets outside Japan, according to HSBC Holdings Plc data.

The increasing risk of defaults by companies means bad loans in the nation’s banking system may more than double, according to the central bank.

Non-performing credits may climb to 5.8 percent of total advances in two years from 2.8 percent in September, in the worst-case scenario, the Reserve Bank of India said in a report released on Dec. 22. Bad debts could be as much as 3.5 percent of loans by March 2013 using a “baseline macroeconomic scenario” and between 4.7 percent and 5.8 percent under a “severe macroeconomic stress scenario,” according to the report.

“Steel and textiles are additions to the list of sectors that are under stress in the last quarter because of borrowing costs and tough financial market conditions,” M.D. Mallya, Mumbai-based chairman and managing director at state-owned Bank of Baroda, said in an interview on Jan. 9. “Corporate performances weakened in the last quarter. The situation may continue this quarter because funding costs aren’t easing.”

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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