The agency has bucketed these 240 entities into the ERR (elevated risk of refinancing) and Stressed (already in default) categories. INR5.1trn debt falls under the Stressed category and another INR6.7trn debt is under ERR for FY17. Ind-Ra's analysis indicates that entities in the ERR category holding INR4.6trn of debt could already be delinquent while the other entities holding the balance INR2.1trn of debt are solvent and may be able to raise financing with additional collateral. They, however, remain exposed to downside risks in the event of liquidity stress and/or escalation in risk aversion by banks.
According to Ind-Ra's analysis, 80% (INR1.7trn) of the FY17 refinancing requirements stems from 100 entities out of which 39 (INR527bn) entities belong to the Stressed category and 33 (INR600bn) belong to the ERR category. Ind-Ra believes entities in the ERR category whose total asset coverage ratio and/or interest cover ratio are below 1x will face difficulties in debt refinancing given banks' (especially public sector units) risk aversion to such stressed assets and capital unavailability. The median credit metrics for the ERR category deteriorated over FY11-FY16 driven by increasing debt and lower growth in operating profits.
Entities in the HER (high ease of refinancing) and MER (medium ease of refinancing) categories (52% of total debt) have refinancing requirements of INR153bn and INR557bn, respectively, for FY17. Ind-Ra believes these entities would gain a competitive advantage with improvements in domestic demand. This is because of their stronger operating profitability, positive cash flows, and larger cash and liquid investments than those of the ERR and Stressed category corporates. These entities have stronger business and financial profiles, additional collateral or parental /or group support to manage repayments as well as plan for the next phase of growth capex and investments and acquisitions. However, most of these entities are unlikely to venture significantly into growth capex before 2HFY19. Ind-Ra elaborated this in itsCorporate Risk Radar report published in March 2016.
Capital intensive and commodity-linked sectors are primarily in the Stressed and ERR categories and would continue to pose risks to creditors during the course of FY17. On the other hand, the consumption and low leveraged sectors are primarily in the HER and MER categories and would continue to gain traction. The sectoral break-up of refinancing required indicates a significant concentration in leveraged sectors such as metal and mining, infrastructure and construction, oil and gas, power and telecom which together contribute 60% to the total debt and 47% to the total refinancing requirement.
Some of the ERR category entities benefit from group/parental support reflected in their investment grade ratings (39% having 'BBB-' and above on the domestic scale). However, many are believed to have a significant downside risk, given that the cash flow improvements, if any, would likely be insufficient to improve the financial positions of these entities meaningfully in FY17. However, HER and MER categories have a high proportion (in excess of 85%) of investment grade entities benefitting from improving cash flows, flexibility of offering collateral or group/ or parental support.
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The banking sector exposure to the ERR (FY15: 24.9%, FY12: 26.8%) and stressed (18.7%, 19.5%) groups has grown at a muted level since FY12, while the exposure to the HER (31.2%, 29.7%) and MER (25.2%, 24%) categories has increased. ERR and Stressed category corporates continue to have a high dependence on the domestic banking system. Given their weak credit metrics and negative free cash flow, their ability to access domestic capital markets or tap foreign currency markets is limited. Ind-Ra analysed the top 10 mutual funds houses have an exposure of INR670bn in the top 500 corporates. The exposure in the ERR category is 4% and in the Stressed category is negligible at 0.3%, while it is significant in the HER (45%) and MER (51%) categories.
Ind-Ra in its earlier report on refinancing risk of top 100 borrowers published in January 2014 had analysed the 100 largest corporate borrowers. In FY15, of the 20 entities identified to be the ERR category, four are currently in default and another 10 are under stress. The report has been extended to the top 500 borrowers and the categorisation will provide help banks and investors in their credit decisions.
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