Lenders remain opposed to the risk of additional loans or changing loan terms: Ind-Ra
India Ratings and Research (Ind-Ra) said lenders remain risk averse despite only 5% of its 450 rated issuers in the Medium and Emerging Enterprise (MEC) space taking advantage of the Reserve’s financial restructuring facility. Bank of India (RBI) available until December 31. , 2020.
The credit rating agency, in a report, found that bankers remained extremely reluctant to risk extending additional loans or changing lending terms for issuers (companies) with low liquidity, an effect of high leverage or whose credit profile is unlikely to improve in the medium term.
Ind-Ra observed that the back-up package offered by banks and demand from festivals, coupled with positive sentiment, will partially ease short-term liquidity headwinds for lower-rated mid and emerging companies.
However, the agency expects funding constraints to increase for issuers with tight liquidity and a low credit profile in fiscal years 22 and 23, reducing financial flexibility for those who have not taken advantage of restructuring their loans.
On the MEC portfolio rated by Ind-Ra, 56% of issuers belonging mainly to the “IND BB” rating categories and below have a stretched liquidity profile. Of these, 74 percent belong to the discretionary and industrial segments.
“Developments like the fear of a second wave of a pandemic … the availability of liquidity with issuers at the end of the first half (April-September) of fiscal 22 once the additional available bank funding is exhausted are elements of key controls, ”said Shivani Suvarna, analyst, Ind-Ra.
Ind-Ra believes that despite the short-term liquidity relief, the return to the pre-Covid profile would be extended, especially for those in the discretionary segment.
The agency said it will continue to monitor the credit and liquidity profile of issuers in the MEC space and may take negative rating actions for issuers with low liquidity or a deteriorated long-term credit profile or a combination of both.
Restructuring: lower than expected
Ind-Ra attributed the smaller-than-expected restructuring to various government measures and a faster recovery in domestic demand, supported by a marginal recovery in exports in some sectors.
“Issuers that have benefited from restructuring are primarily rated in the ‘IND BB’ rating categories and below with stretched liquidity.
“These issuers belong to the industrial and discretionary segments and operate primarily in sectors such as real estate and construction and engineering,” said Suvarna.
Ind-Ra believes the weaker restructuring stems from the 3 lakh crore emergency line of credit guarantee program and Covid-19 loans provided by banks, providing respite for issuers with low liquidity and increasing their ability to resisting the sustained cash pressures caused by the Covid-19 led to the lockdown.
“Although not all issuers benefited from the additional financing, so did entities down the value chain.
“Many banks have also automatically converted interest due on moratorium working capital loans into term loans, thereby eliminating the need for issuers to apply for the restructuring plan,” the report said.
In addition, the revised definition of micro, small and medium enterprises (MSMEs) has improved the access of newly included entities to finance the financial system.
Ind-Ra also believes that the sentiments of the issuers played a role in their failure to profit from the restructuring plan. The tightening of liquidity suffered by issuers in 1HFY21, supported by the start of a recovery in 3Q (October-December) FY21, led to believe in their increased resilience vis-à-vis their liabilities.
The opening of offices, factories, retail stores and malls supported by demand from festivals and weddings led issuers to see a steady upturn in their credit profiles from October to December 2020, according to The report.
The recovery of players operating in the textile sector was reinforced by an improvement in demand on their export markets. Steel production and consumption are improving month over month, supported by an increase in demand which is reflected in its prices.
The auto industry also grew 6% year-on-year as of Dec.31, 2020, helped by demand from festivals, boosting confidence in small and medium-scale auto dealers and OEMs.