Crisil downgrades exceed upgrades

Global acquisitions and large capital expenditures drive rating actions

There has been a reversal in the rising graph of the credit quality of Indian corporates in the six months to September 2007, after five years of consistently improving creditworthiness.

A CRISIL study of its rating actions for the first half of 2007-08 (FH08) reveals that the reversal is driven by large debt-funded acquisitions and capacity expansions by corporates, reflecting their increasing risk appetite.

CRISIL's modified credit ratio (the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) for FH08 dropped below 1 time - to 0.94 times - for the first time since 2002-03. In other words, from April to September 2007, there were more downgrades than upgrades in CRISIL's ratings - seven downgrades, as against only one upgrade.

In its Ratings Round-Up for financial year 2006-07, CRISIL had predicted that the downgrades during FH08 would be driven by the increasing risk appetite of corporate managements. In fact, six of the downgrades during FH08 were due to acquisitions, or large debt-funded capacity expansions.

According to Ms. Roopa Kudva, CRISIL's Managing Director and Chief Executive Officer, "Indian corporates' global ambitions and intent to grow faster are driving the current phase of acquisitions and capacity expansions. Going ahead, we expect credit quality to be increasingly driven by companies' success in integrating acquired entities and managing capacity expansions, and the funding mix employed for further acquisitions and expansions."

Mr. Raman Uberoi, Senior Director - Ratings, CRISIL, adds: "Indian corporates have, over the last few years, strengthened their financial profiles on the back of sustained economic growth. However, rising input costs and higher interest costs on account of the large debt-funded acquisitions and capacity expansions may continue to add pressure on credit quality. The increase in the proportion of negative outlooks also indicates a possible deterioration in the credit quality of Indian corporates over the short to medium term."

About CRISIL Ratings Round-Up: CRISIL's Ratings Round-Up is a semi-annual publication that analyses CRISIL's rating actions, and traces the linkages between these actions and underlying economic trends and business factors. Because credit rating is an opinion on the likelihood of timely future debt repayments, an analysis of rating actions in a large and diverse portfolio of rated companies is a good indicator of economic prospects. The current publication analyses CRISIL's rating actions in the first half of 2007-08.