India Ratings and Research (Ind-Ra) estimates that only 5% of its rated 450 issuers in the mid and emerging corporates (MEC) space had availed the Reserve Bank of India’s financial restructuring facility available till December 31, 2020. The lower-than-expected restructuring was on account of the various government measures and faster demand recovery in the domestic market, supported by a marginal pick-up in exports in certain sectors.
Issuers having availed restructuring are primarily rated in the ‘IND BB’. Such issuers belong to the Industrial and Discretionary segments and operate mainly in sectors such as real estate and construction & engineering. Ind-Ra has taken rating actions on such issuers in accordance with its policy on Treatment of Restructuring due to COVID-19 Related Business Disruptions.
Ind-Ra believes the lower restructuring stems from the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme and the COVID-19 loans provided by banks, offering respite to issuers with weak liquidity and increasing their ability to withstand the sustained cash flow pressures caused by the COVID-19 led lockdown.
Even though not all issuers had availed the additional funding, the same has flowed down to the entities lower down the value chain. Many banks have also automatically converted the interest due on the working capital loans under moratorium into term loans, thus, eliminating the need for the issuers to apply for the restructuring scheme. Moreover, the revised definition of micro, small and medium enterprises (MSMEs) has enhanced the access of freshly included entities to funding from the financial system.
Ind-Ra also believes that the sentiments of the issuers have played a role in them not availing the restructuring scheme. The liquidity crunch endured by the issuers in 1HFY21, backed by the onset of a recovery in 3QFY21, has led to a belief of their increased resilience towards their liabilities.
The opening of offices, factories, retail stores and malls backed by the festive and marriage season demand has led to the issuers witnessing a steady recovery in their credit profiles over October – December 2020. Recovery for players operating in the textile sector was augmented by a demand improvement in their export markets.
Ind-Ra opines that bankers have remained extremely risk-averse to extend additional lending or alter the lending terms for issuers having weak liquidity, high leverage or where the credit profile is unlikely to improve in the near to medium term.
The relief package offered by banks and festive demand coupled with positive sentiments will partially abate the near-term liquidity headwinds for lower rated mid and emerging corporates. However, Ind-Ra expects funding constraints to increase for issuers having stretched liquidity and a weak credit profile over FY22 and FY23, reducing the financial flexibility for those that have not availed loan restructuring. Of Ind-Ra’s rated MEC portfolio, 56% of the issuers primarily belonging to the ‘IND BB’ and below rating categories depict a stretched liquidity profile. Of these, 74% belong to the Discretionary and Industrial segments.
Developments like the fear of a second wave of pandemic, emerging of a new coronavirus strain and the availability of liquidity with the issuers at end-1HFY22 once the additional bank funding availed is exhausted are key monitorables. Ind-Ra believes that notwithstanding the short-term liquidity relief, reverting to the pre-COVID profile would be prolonged, especially for the ones belonging to the Discretionary segment. The agency will continue to monitor the credit and liquidity profile of the issuers in the MEC space and could take negative rating actions for issuers having weak liquidity or deteriorated long-term credit profile or a combination of both.