Thu, 26th November 2015

Anirudh Sethi Report


Archives of “credit rating” Tag

Bad loans by public sector banks soar 27 per cent in a year.Overall NPAs now amount to Rs 3,36,685 crore.Just Hang The Bankers & Debt Creators

Already burdened by bad loans, 37 banks, led by public sector ones, have reported a 26.8 per cent rise in non-performing assets (NPAs) over the 12-month period ending September this year.

This is a nearly 10 per cent rise from the 16.9 per cent growth in bad loans over the same period a year ago, with several projects, especially those in the infrastructure sector, stuck.

While the overall NPAs now amount to Rs 3,36,685 crore, the rise in the last 12 months ended September 2015 was Rs 71,000 crore, according to figures compiled by credit rating CARE.

The banks with a major share in bad loans include Bank of India, Bank of Baroda, Indian Overseas Bank, SBI and Punjab National Bank.

The figures show a continuous acceleration in the growth of NPAs, from 4 per cent in the second quarter of FY2014 to 4.2 per cent in Q2 of FY2015 and 4.9 per cent in the second quarter of FY2016.

At the same time, in the second quarter of FY16, net profits of banks also declined, by 1.5 per cent, compared to the positive growth rate of 29.5 per cent in the same period last year. The net profit margin came down to 7.7 per cent from 8.3 per cent during this period.

Among the big banks, the bad loans of Bank of India soared from Rs 14,127 crore to Rs 29,893 crore, of Bank of Baroda from Rs 13,057 crore to Rs 23,710 crore, and of Indian Overseas Bank from Rs 13,333 crore to Rs 19,423 crore.

bad loanThe silver lining is SBI, India’s largest bank, whose asset quality improved, with gross NPAs as a percentage of gross advances falling 74 bps to 4.15 per cent (Rs 56,834 crore) from 4.89 per cent (Rs 60,712 crore).

7th Pay Commission report: Fiscal maths gets tougher

Though the government is confident it will be able to bear the full cost of the Seventh Pay Commission (SPC), the maths looks daunting. The 0.46% of FY17 GDP that will to be borne by the central government – the rest will be part of the railway budget – does not include the arrears for January to March 2016, so the total cost will be 0.58% of GDP. There is an additional cost of higher salaries to teachers, for instance – while this is not a part of the formal government salary structure and so does not reflect in the SPC numbers, it will be seen in the form of higher outgoes for the education budget; it is difficult to estimate this number, nor is it clear whether the adjustment will take place in FY17 or FY18. Add to this the 0.16% needed for bank recapitalization and we’re talking of an additional expenditure of 0.74% of GDP. Once you add the costs of pay commissions of various state governments, the final cost to the economy could be 2% of GDP – credit rating agencies will factor in that while rating the country.

Unlike in FY16, finance minister Arun Jaitley may not have the luxury of higher taxes afforded to him because of sharply reducing crude oil prices – he could, due to this, levy higher taxes on petrol and diesel while allowing consumer prices to fall. Taken together with the petroleum duties, hiking duties on the automobile sector to earlier levels netted Jaitley around Rs 45,000 crore or 0.3% of GDP. In normal circumstances, curbing growth in government expenditure would be the way out, but given weak private investment, that would not be prudent. Telecom auctions have been seen as a way out in the past, but there is just that much they can give, plus with a shortfall in disinvestment targets this year, there is a possibility that auctions may be held before March, limiting the scope for another round. That means Jaitley has to do very aggressive disinvestment along with cuts on wasteful expenditure on subsidies – that is, Aadhar-based cash transfers have to be rolled out by early FY17 to eliminate the waste in food subsidies. Otherwise one of Jaitley’s impossible trinity – lowering the deficit, hiking government salaries and maintaining a high capex – will have to give.

India: The Banks Are Getting Insolvent

Let me rather begin by asking a lot of rhetorical questions…
** What does it mean when HDFC Bank takes a 40% write-off on Essar steel exposure, IDFC takes 50% write-off of their stressed (power exposures) and now Axis Bank takes a whopping 65% write off of their power exposure to a particular group?
** What does it tell about the state of the economy, state of bankers, state of promoters who have little skin in the game as they have already taken out their equity by inflating project costs?
** What does it tell about the hope that these banks are having about the Government’s effort in reviving these projects, about some of these promoters and their ability to recover the project?
** Have you ever noticed that debt gets restructured in India by giving more debt? Where is the promoter’s equity infusion in projects that are restructured? And if that isn’t happening what is the point of all this debt restructuring and debt refinancing? The default rates from CDR restructured assets are just increasing every quarter and that’s because the promoter never brings the equity as promised (Refer the table at the end)
** If credit rating agencies have downgraded debt of JPA, GMR, Essar to default category don’t you think it’s just a matter of time for banks to recognise?
** If private sector banks are facing such issues, what about the PSU banks and how can one have any confidence in them?
** Is it now not a credibility issue as Axis guided something and something else has played out?
** What is the difference between Axis and ICICI then?
So having asked all those questions let me air my views (yes there is more left after those questions) on what is happening…

S&P downgrades Valeant outlook to negative

vrxThings are not looking up for Valeant Pharmaceuticals.

Standard & Poor’s lowered its outlook on the Canadian drugmaker to “negative” from “stable” citing risks to growth but affirmed its BB- corporate credit rating.

Valeant shares have tumbled 24 per cent in the past week after a short seller questioned the company’s relationship with Philidor, a pharmacy group.

S&P said:

We view the Philidor relationship and marketing strategy as unconventional and very aggressive, and we expect payers to increasingly push back on reimbursement, potentially reducing the viability of this channel.

Earlier this month, the company revealed that it had received subpoenas from US prosecutors related to drug-price decisions. The ratings agency also noted that the “negative attention the company has attracted due to drug price increases and its aggressive marketing tactic increase potential legal, regulatory, and reputational risks to the company.”

Moody’s: China responds to challenges of economic rebalancing -Full Text

Moody’s Investors Service says that slower economic growth and rising credit risk are symptoms of the challenge that China (Aa3 stable) faces with structural rebalancing and are developments which have become more prominent since mid-2015.

“Recent events have tended to illustrate the scale of the task confronting the authorities in managing the policy trade-offs involved in structural rebalancing,” says Jenny Shi, a Moody’s Managing Director and Country Manager for China.

Moody’s defines China’s rebalancing challenge as the need to engineer economic restructuring, policy reform, market liberalization, and slower credit uptake with the aim of shifting economic growth drivers away from state-led investment — all without sacrificing short-term macroeconomic stability.

“While there is evidence that the economy is gradually re-orientating away from state-led, capital-intensive growth, the trade-offs are slower headline economic expansion, accelerating capital outflows, and a less certain policy trajectory,” says Shi. “System leverage also continues to rise despite slower credit growth.”

Shi made her remarks in a speech on 22 October to a conference organized by the US China Business Council in Shanghai. She spoke on the themes of the outlook for China’s economy, corporate credit and the development of China’s bond market.

India Inc debt’s piling up, asset sales aren’t helping

A year ago, it looked as if asset sales were the answer to India Inc and the banking sector’s $120 billion dollar problem, namely that of a lot of loans to India’s top-10 stressed groups going bad. The central bank’s strategic debt restructuring (SDR) focus was on getting promoters to let go of businesses and use the money to repay debt; that was also the focus of the centre’s planned bankruptcy law; to the extent possible, banks also leaned on some promoters and brokered some marriages at gun point.

Based on the results of Credit Suisse’s latest version of its House of Debt series, this doesn’t seem to have worked, and not just because the asset sales still continue to remain muted with India Inc still kicking and screaming when it comes to asset sales. As a result, the interest-cover of these most-indebted groups – at 0.9 in FY14, it suggested defaults on the horizon – worsened further. In FY15, while the debt for these groups has continued to pile up – by an amazing seven times in 8 years – the interest cover fell to 0.8 and the debt-to-equity ratio rose from 1.9 in FY14 to 2.1 in FY15.

The numbers are far worse for individual companies. With an ebit loss for Videocon, the interest-cover is negative, and not much better at zero for the GVK Group, 0.2 for the GMR Group and 0.6 for the Japyee Group which has also been the most aggressive when it came to asset sales in FY15. In the case of GMR Infra which sold Rs 11,000 crore worth of assets, Credit Suisse says, net debt levels are up from Rs 35,500 crore in FY14 to Rs 42,900 crore in FY15.


Standard & Poor’s -Vedanta Resources PLC Ratings Lowered To ‘B+’ From ‘BB-‘ On Weak Financial Position; Outlook Negative

  • Vedanta Resources’ financial performance is likely to remain weak for at least 12-18 months because of weak commodity prices and the company’s high debt.
  • Vedanta Resources has to refinance its lumpy maturities in mid-2016 and has a high level of short-term debt, which we expect its good banking relationships will help address.
  • We are lowering our foreign currency long-term corporate credit rating on Vedanta Resources and our long-term issue ratings on the notes and loans that the company issued or guarantees to ‘B+’ from ‘BB-‘. We are removing the ratings from CreditWatch, where they were placed with negative implications on Sept. 9, 2015.
  • The negative outlook reflects the risk that Vedanta Resources’ financing for its upcoming maturities could be delayed or the company’s financial performance may not recover in line with our expectations in fiscal 2017.

Corporate ratings cuts accelerate in ’15 – S&P

Standard & Poor’s has already axed more corporate credit ratings this year than it did in 2013, or 2014, amid tepid economic growth, and a looming rate rise.

The New York-based ratings company said Friday it has already downgraded 296 corporate debt issuers this year, outpacing 262 in full-year 2013, and 276 the next year. Meanwhile, the number of upgrades has fallen 8 per cent on a year-over-year basis.

S&P said it expects the Federal Reserve to increase its benchmark lending rate in December for the first time since 2006, which it expects to put upward pressure on the interest rates companies need to pay on their debt.

“We expect this eventual rise in interest rates and corporate funding costs will lead to an increased focus on credit quality,” said Diane Vazza, head of S&P’s global fixed income research group.

Indeed, the cost of insuring corporate debt has risen since the beginning of the year, according to data from Bloomberg.

The spread on the CDX IG, which tracks a basket of credit default swaps that insure investment-grade debt, is up 17 basis points since the beginning of the year. The spread on the high-yield counterpart is up 94 basis points.

Italy seeks to prosecute S&P and Fitch over ratings

Prosecutors in Italy are preparing to reopen the wounds of the eurozone debt crisis as they fight a crisis-era downgrade that put Italian creditworthiness level with Kazakhstan’s.

Five employees from global credit rating agency Standard & Poor’s and one from Fitch are accused of inflicting unjustified damage to Italy for their role in credit rating decisions in 2011 and 2012.

The case is a late addition to the global lawsuits that have been raised against the world’s largest credit rating agencies for their role in the financial crisis.

What marks the trial sought in Trani, southern Italy, as unusual is that individual employees are being accused alongside the agencies, although given the time lag since Italy’s rating downgrade a number have since left S&P and Fitch and now work elsewhere.

Italians are sceptical. Last year, Italy’s state auditor was roundly mocked for suggesting it could claim more than €200bn in damages because S&P did not take Italy’s history, art and landscape into account when downgrading the country. Since 2012 the country’s rating has fallen still further to one notch above junk status as a result of weak economic growth and one of the largest burdens of debt in the world.

In late September, judges in Trani decided not to approve a transfer request from the defence to move the trial to Rome or Milan.

S&P and Fitch deny the allegations. Read More 

Hedge funds giving up on Abenomics trade

The ‘Abenomics trade’ – buying Japanese stocks and selling the yen – is falling out of favour.

Last week, ratings agency Standard & Poor’s took a red pen to its credit rating on Japan,downgrading the country’s debt, saying that:

Despite showing initial promise, we believe that the government’s economic revival strategy — dubbed ‘Abenomics’ — will not be able to reverse this deterioration in the next two to three years.

It seems some investors agree.

In a new note, Deutsche Bank says “everyone is giving up on Japan”, with “hedge funds scaling back their long Nikkei and short yen positions.” It adds:

Already, asset managers have their smallest long Nikkei position in over a year. This is further supported by the most recent weekly capital flow data which shows the largest foreign selling of Japanese stocks in years.

It seems the volatility over the past few months is causing the biggest adjustments in investors positions around Japan.

The chart below comes from Deutsche’s report.