India Ratings and Research (Ind-Ra) believes the path to recovery for most of the corporate sectors would vary depending on the uptick in demand post the lockdown and the ability of entities to respond to supply-side issues. Most sectors are likely to report lower operating cash flows and impairment of capital structures, even within these, those which are at the forefront of social distancing norms or linked to discretionary spending may not recover to their pre-COVID-19 levels until 2HFY22. While any liquidity buffers in the interim will aid entities with temporary cash flow mismatches, those that are highly leveraged and reliant on refinancing prior to the COVID-19 outbreak could find it increasingly difficult to recover post the outbreak is contained.
profiles, Ind-Ra has drawn out a framework for assessing the rating trajectory
for the rated issuers, and is evaluating the extent of impairment of the
balance sheet along with the nature of any such impairment. In cases where the
deterioration in the credit metrics is not expected to reverse in the near
term, negative rating revisions may be warranted, despite comfortable near-term
liquidity buffers. In general, majority issuers will most likely breach
negative sensitivities in view of the revised forecasts for FY21. Ind-Ra’s
expectation of a recovery for such issuers to the pre-COVID-19 levels by FY22
and thereafter will determine whether rating actions are warranted in the
interim. While FY22 is likely to be better than FY21, many entities could still
see significant stress from the second and third order impact of demand
contraction and liquidity tightness.
Given the unprecedented nature of this crisis, Ind-Ra believes revisions in assumptions and forecast may be larger than usual. The report aims to highlight the construct within which the key estimates, to be used in rating forecasts, are expected to be built. To this effect, Ind-Ra’ sector analysts, based on their understanding of the demand and supply dynamics, have estimated a recovery path for each of the sectors 35 corporate sectors in the large corporate portfolio for FY21 and FY22.
Ind-Ra is also reaching out to its issuers to better understand their coping strategies and identify key credit mitigants. The agency is incorporating them while modelling revised base case estimates. The agency would continue to communicate any changes in its assumptions and the trajectory of recovery. Furthermore, Ind-Ra would communicate entity-wise assumptions it is making while evaluating each credit as part of its rating action commentary.
This report follows our previously published FAQ and summarises the key aspects that are behind the review of all our ratings and have been sought by investors to better understand Ind-Ra’s approach towards evaluating ratings during this phase. The report is freely available on our website www.indiaratings.co.inThe key questions answered in the report include the following:
· What is the framework that we have used to assess the path to recovery for each of the sectors?
· How will Ind-Ra assess the rated trajectory of issuers across these sectors? How long will the downturn last?
· Why are we forecasting in an uncertain environment?
· What are our initial adjustments to forecasts?
· What is the outcome of revised assumptions for Ind-Ra rated entities?
· Will Ind-Ra revise its forecasts?
· Does Ind-Ra expect the downgrade to upgrade ratio to deteriorate during FY21?
· Do we expect default rates to increase during FY21?
· Which entities would take longer to emerge from this disruption?
· Does extra liquidity affect ratings?
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.