Corporate debt stress: upgrades plunge, downgrades steady

India's corporate debt worth Rs 33.22 lakh crore has come under severe stress as the number of rating upgrades have plunged while the downgrades have remained steady.

For the first quarter ended June 30, 2020, the upgrades to downgrades ratio by the rating agencies has fallen sharply, revealing severe stress across India Inc due to the coronavirus pandemic.

Rating agency India Ratings made just 24 upgrades for every 100 downgrades during the quarter. The rating agency has made 106 rating downgrades, while making just 25 upgrades. In the previous quarter, ended March 30, 2020, the rating agency had made 32 upgrades for 117 downgrades.

The last time the number of rating upgrades by the agency outnumbered the downgrades was eight quarters ago during Q1, FY19 when it had upgraded 105 debt instruments and downgraded 77 instruments.

"India Ratings had witnessed a significant correction in the upgrade/downgrade ratio starting from Q2 FY19, as macroeconomic stress started cropping up in issuer performance... As India saw its GDP forecasts for FY20 cut through the year, so had the pace of deterioration in the corporate credit profile. The unexpected and sharp deterioration in macroeconomic parameters were broad-based, with the key indicators across sectors at multi-year lows," Ind-Ra spokesperson told DH.

Similarly, for CARE Ratings, there have been just 31 upgrades for 100 downgrades in the quarter ended June 30, 2020. The rating agency made 46 upgrades while making 149 downgrades. In the previous quarter, ended March 30, it had done 154 rating upgrades, while downgrading 238 instruments.

The last time the upgrades by the rating agency outnumbered the downgrades were five quarters ago in Q4, FY19 when it had upgraded 322 debt instruments and downgraded 214.

For most bonds, credit risk – or changes that make it more or less likely to default – is a key element of performance. When a bond is upgraded, investors are willing to pay a higher price and accept a lower yield. When a bond is downgraded, the opposite is true.