Thu, 19th January 2017

Anirudh Sethi Report


Archives of “credit rating” Tag

India : Limited room to reduce fiscal deficit to 3% in FY18: Moody’s

The government is likely to achieve its fiscal deficit target of 3.5 per cent of GDP in the current fiscal but higher infrastructure spending will limit the room to reduce it further to 3 per cent in 2017-18, Moody’s said today.

The credit rating agency expects the government to renew its commitment to increase capital spending and address the short-term disruptive impact of demonetisation in the Budget to be unveiled on February 1, 2017.

“On the fiscal front, the government will likely remain committed to achieving its fiscal deficit target of 3.5 per cent of GDP for the fiscal year ending March 2017. However, room to reduce the deficit further to the target of 3 per cent of GDP in the following year will be limited, due to the need for increased infrastructure spending and higher government salaries,” Moody’s Investors Service said in a statement.

It said that in an environment of lacklustre global trade and with economies globally facing the increasing risk of protectionism, India’s very large domestic markets provide a relative competitive advantage when compared to smaller and more trade-reliant economies.

The implementation of the pending GST and other measures aimed at enhancing income declarations and tax collection will help widen India’s tax base and boost revenues, it said, adding that such a boost will however only materialise over time, with the magnitude uncertain at this point.

ICRA pegs revenue loss from toll collections suspension in first 10 day at Rs 460 cr; road project debt servicing under lens

The debt servicing ability of road projects would be under strict watch over the next few months, as the impact of demonetisation on the cash flows becomes clear, say credit rating agencies.

Although the National Highways Authority of India (NHAI) has authorised its regional officers to make payment covering 90% of the interest amount provided in the financial/refinancing package to the concessionaires on submission of the required documents, this would remain inadequate, say analysts.

Shubham Jain, vice president, ICRA said, “Unlike annuity road projects, wherein the principal repayment falls due on semi-annual basis, majority of the toll road projects have monthly debt-repayment frequencies. With only interest cost and operations and maintenance expenses getting compensated, the compensation will be inadequate from the debt servicing point of view, unless the project has DSRA or other cash reserves to fall back on”. However, Jain said that the projects with DSRA constitute a very small percentage of the operational projects and hence the credit impact on the sector can be substantial.

Power sector debt worth Rs 1.34 trillion at high risk: Crisil

Nearly Rs 1.34 lakh crore worth of debt on operational and under-construction power projects is at risk, says ratings agency Crisil.

As per Crisil estimates, around 17,000 MW of operational power projects with a debt of Rs 70,000 crore and additional 24,000 MW under-construction projects with a debt exposure of around Rs 64,000 crore are at high risk.

“These operational projects are those, which are facing the consequences of aggressive bidding for coal supplies or facing huge cost overruns, and those with gas-supply issues,” Crisil Senior Director Sudip Sural said.

He said over the period, the credit growth to the sector will moderate to 5 per cent over the next three years as compared to an average of 18 per cent witnessed in the last five years.

“This is primarily because the discoms debt which has been the key components of this exposure, is going to go out of the banking system over a period of time and move to the fold of the state government because of the UDAY scheme,” Sural said.

S&P ups outlook on France’s AA rating

Here’s something to cheer up France’s deeply unpopular president François Hollande.

S&P Global Ratings has upped its outlook on the country’s AA rating from negative to stable, with analysts at the agency citing the government’s recent labour and tax reforms for the move.

The outlook revision reflects the authorities’ gradual introduction of reforms to the tax system and the labor code, and the stabilizing effects these are expected to have on employment, growth, and competitiveness, as well as public finances. The rating has been on a negative outlook for nearly two years. We do not believe that the downside risks we identified then have materialized.

It has been nearly two years since S&P first put Europe’s second largest economy’s credit rating on negative outlook and Friday’s move should a much needed respite to Mr Hollande, whose approval ratings have sank to record lows with less than six months to go before the presidential elections.

This Week Eyes on 4 Events

Of the forces driving prices in the week ahead, events appear more important than economic reports.   There are four such events that investors must navigate.  The Bank of Canada and the European Central Bank meet.  The UK High Court will deliver its ruling on the role of Parliament in Brexit.  The rating agency DBRS updates its credit rating for Portugal.
The Bank of Canada is not going to change interest rates.  Still, growth has disappointed, and price pressures appear to be ebbing.  It will take longer than the BoC is currently anticipating to close the output gap.  It may adjust its forecasts accordingly.  In addition, the recent use of macro-prudential policies to address housing market activity eases one of the inhibitions for a rate cut.  The market is currently pricing in about a one in 20 chance of this materializing next year.
The risk may be somewhat greater than that  In part, there seems to be too much made of the trade-off between the fiscal stimulus and monetary easing.  It is so pre-crisis.  This week’s data is likely to show that CPI continues to moderate and, despite the launch of a new low-income family benefits program, retail sales like fell in August, and the risk is on the downside of the median forecast of -0.1%.
It does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities.  Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.

RED ALERT – China Shocker: A Quarter Of All Companies Can’t Pay The Interest On Their Debt

Almost exactly one year ago, we reported that as a result of the commodity crash of 2015, more than half of Chinese companies in the commodity sector did not generate enough cash flow to pay the interest on their debt. Months later this has manifested in a countrywide push for debt-for-equity exchanges, and outright bankruptcies including the first ever liquidation of a Chinese state-owned enterprise.

While dramatic, the question remained: what about other Chinese companies not directly involved in the commodity space? We now know the answer: according to Reuters, profits at roughly a quarter of all Chinese companies were too low in the first half of this year to cover their debt servicing obligations, i.e., merely the mandatory interest payment let along debt maturities, as earnings languish and loan burdens increase. Read More 

Turkey junked by Moody’s

The unkindest cut.

Ratings agency Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to Ba1 with a ‘stable’ outlook on Friday — placing the country’s credit rating in junk territory.

Moody’s, which had previously delayed its decision, cited two key reasons for the downgrade:

1. The increase in the risks related to the country’s sizeable external funding requirements.

2. The weakening in previously supportive credit fundamentals, particularly growth and institutional strength.

The agency said it expects that the deterioration in Turkey’s credit rating will continue over the next two to three years. It added that the stable outlook reflected “the government’s robust balance sheet, which would allow for the absorption of shocks and flexible responses”.

Moody’s also said it sees Turkey’s real GDP growth averaging 2.7 per cent between 2016 and 2019.

S&P Global Ratings has already placed Turkey’s credit rating in junk territory while Fitch has Turkey’s BBB- investment grade rating on review for a downgrade.

Debt-Led Telecom War May Blow $74 Billion ( Rs. 4,92,140 crores )Hole in India’s Budget

Aggressive price wars that pushed some calls below a penny per minute in India may be catching up with wireless carriers.

Mountains of debt could hinder their bidding for airwaves in next month’s auction, potentially blowing a $74 billion (roughly Rs. 4,92,140 crores) hole in the government’s plans. One operator already said it will sit out the sale starting October 1, and some competitors likely won’t spend on certain wavelengths.

India plans its biggest sale of the spectrum that can reduce buffering on videos and speed up downloads for 1 billion-plus users in the world’s second-largest smartphone market. The government wants to raise Rs. 5.6 lakh crores ($83 billion), yet companies may bid only a small fraction of that because they bought bandwidth the past two years and need cash to fend off billionaire Mukesh Ambani’s newest venture.

“We believe that the spectrum auction is going to be a failure,” said Chris Lane, a Hong Kong-based analyst for Sanford C. Bernstein. “Overall, we don’t see carriers bidding like they did in previous years.”

The nation’s 12 wireless companies carry more than $61 billion (roughly Rs. 4,05,558 crores) in debt, and their average revenue per user is declining as customers replace voice calls with apps that use data plans, according to company earnings. That total debt increased 41 percent since March 2014, according to credit rating agency ICRA.

The auction will be successful and the government has provided spectrum in every band, Telecom Secretary J.S. Deepak told reporters in New Delhi on Tuesday.

Phone calls already are the cheapest among the world’s major economies, Lane said, averaging about 2 cents a minute now after dropping below 1 cent.

Fitch cuts outlook for Turkey’s rating to negative

Safe, for now.

Fitch has cut its outlook for Turkey’s sovereign credit rating to negative from stable, but maintained the country’s BBB- investment grade rating, as the agency continues to assess the fallout from the unsuccessful coup attempt in July.

The change to Turkey’s outlook comes just a week after Moody’s decided to delay its ratings decision for the country. The decision should also come as a relief for those who have been bracing for Fitch to follow Standard & Poor’s move last month to downgrade Turkey’s rating.

In a statement, Fitch said:

An unsuccessful coup attempt in July confirms heightened risks to political stability…Political uncertainty is expected to impact economic performance and poses risks to economic policy. Growth is forecast to dip due to lower investment, although a strong start to the year means that at a Fitch-forecast 3.4% of GDP in 2016, it will be above the peer median.

Global corporate debt is expected to swell to $75tn by 2020-Standard & Poor’s

Global corporate debt is expected to swell to $75tn by 2020, from $51tn at present, and a correction in credit markets is unaviodable, analysts at ratings agency Standard & Poor’s warn.

And with central banks around the world engaging in expansive monetary policy that has seen interest rates turn negative in Europe and Japan, investors on the hunt for yield are expected to push global corporate borrowing demand to $62tn.