India Inc continues to remain under pressure
Based on the consumption and industrial trends, a large number of sectors have been reporting a gradual recovery to the pre-COVID levels, according to a report by ICRA Ltd.
Many sectors have recovered to 70-90% of the pre-COVID operating metrics as of August 2020. This has been supported by rural demand in some sectors, and a gradual easing of the lockdown measures in others, said the rating agency.
However, the road to recovery is expected to be long for sectors like airlines, hospitality and commercial vehicles, said the corporate sector report released on 9 Sept 2020.
In contrast, sectors like pharmaceuticals and tractors have been relatively unimpacted by the pandemic, said the report, “From Moratorium to Loan Restructuring: The road ahead for India Corporate Inc”.
These findings are as per the latest data (July/August 2020) and are in comparison with the pre-COVID levels (January/February 2020) data.
In effect, while the credit quality of India Inc continues to remain under pressure, the trends in sequential recovery, if sustained, and the potential relief from loan restructuring could prevent a further weakening of credit profiles.
The disruptions caused by the Coronavirus outbreak continue to adversely impact the credit quality of India Inc, it added.
The Q1 FY2021 performance of most entities has been expectedly weak, with sharp earnings and margin contraction in most sectors, as revenues dwindled much sharper than the costs.
The rating agency has taken a large number of negative rating actions since the onset of the COVID-induced disruption and the lockdown, affecting around 16% of its rated portfolio.
The instances and the intensity of negative rating actions could have been higher but for the relief availed by the borrowers from lenders in the form of payment moratorium, as permitted by the Reserve Bank of India (RBI).
Around 27% of ICRA-rated entities availed a moratorium in payments from lenders. The sectors in which there was a greater proclivity to avail a moratorium included real estate, textiles, hospitality, engineering and auto ancillaries.
At the system level, ICRA expects the proportion of the overall loan book under moratorium to decline to around 15% by the end of Q2 FY2021.
The RBI, by way of its circular issued on 6 August 2020, has laid down a framework to enable lenders to implement resolution plans while maintaining the account classification as “Standard”, even when the resolution plan does not involve a change in ownership.
Further, the Expert Committee constituted by the RBI has specified some specific financial metrics, that define the contours within which the lenders are expected to formulate resolution plans.
As per ICRA’s analysis of the BBB and the BB category entities in its portfolio—across sectors–the actual reported TOL/ATNW and Current Ratio is observed to be sufficiently comfortable in relation to the thresholds specified by the Expert Committee.
However, for several sectors, the Total Debt/EBITDA and the DSCR thresholds specified by the Expert Committee are less aligned with the actual ratios reported by the investment-grade entities.
From a rating perspective, this implies that if the loans are restructured in a cut-to-bone manner that the specified metrics are just met, without a further cushion, an investment-grade rating might be difficult to achieve, said ICRA.
Further, while the parameters specified by the Expert Committee outline the boundary conditions for restructuring, in ICRA’s opinion, the efficacy of resolution plans would depend on the appropriateness of the assumptions used by lenders while taking a view on business recovery. #debts #EBITDA #banks #loans #finance #trade #exports /fiinews.com
