Every fourth defaulting firm is paying up, says Crisil

One out of every four companies that had failed to repay loans was able to clear the debt within an average period of 2.5 years from the time of default.

The first-ever study on defaulting Indian companies, carried out by rating agency Crisil, reflects the improvement in the underlying corporate credit quality at a time when the Indian economy is growing at a steady clip.

The Crisil study covered 100 defaulting companies in the manufacturing and infrastructure sectors.

However, Crisil said a comparison between the recovery situation in Indian companies and of those in developed markets was not possible as published recovery rates for the latter were based on dollar volumes and not the number of companies. Nevertheless, the rate of 'emergence' from default and the time-frame for recovery were broadly similar, it said.

For instance, a Standard & Poor's Ratings Services report on ratings performance, default, transition, recovery and spreads, showed that senior unsecured debt-holders in the US ultimately recovered 28 per cent of their exposure in 2002.

The typical time taken for 'emergence' in the US is about 18 months. The Indian companies have been able to move out of the red due to their successful debt restructuring initiatives and the recent cyclical economic upturn.

Measures like rescheduling and extending the tenure of their debt, placing a moratorium on the principal amount and lowering interest rates helped such companies to get out of default and commence timely payments once the economy recovered, Crisil said.

The median debt-equity ratio has fallen 40 per cent from 0.83 in 2000 to 0.56 in 2003 for a sample of 170 companies rated 'investment grade' in the manufacturing and infrastructure sectors. Moreover, the debt market has matured with a greater appetite for extended tenures and low interest rates.

Fifty per cent of the companies in the Crisil sample remain in default of either the interest or principal obligation, or both, and many are in various stages of debt restructuring.

As most of these companies had defaulted on debt that was contracted when the markets were not mature, Crisil was of the opinion that a sizeable debt restructuring package might help many of them to move back into the black.

Crisil has so far upgraded four of these companies from the default ('D') rating to better grades. These are Ambuja Cement Rajasthan Ltd (formerly DLF Cement), Kalyani Steel, Lupin and Arvind Mills.

Of these, Ambuja Cement came out of default as it was taken over by a new management. The other three have been upgraded in the last 18 months following an improvement in their performance and a sizeable debt rescheduling to ease repayment pressures.

Crisil also withdrew the 'D' ratings of over 20 companies after they repaid their rated debts.

Companies that remain in default comprise the largest share of half the 102 companies that were ever rated 'D'.