Only 5% of mid and emerging cos opted for RBI’s restructuring facility: India Ratings

Have various government measures and faster demand recovery in the domestic market saved companies from much expected financial distress? Unexpectedly lower number of companies opting for Reserve Bank of India’s (RBI’s) financial restructuring facility proves so.

India Ratings and Research 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 (RBI’s) financial restructuring facility available till 31 December 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 which have availed restructuring are primarily rated in the ‘IND BB’ and below rating categories with stretched liquidity. Such issuers belong to the Industrial and Discretionary segments and operate mainly in sectors such as real estate and construction & engineering, says the India Ratings analysis.

India Ratings had in its analysis on 8 October 2020 indicated that majority of the restructurings were likely to emanate from the entities in the vulnerable bucket primarily in the ‘IND BB’ and below rating category. 

The rating agency believes the lower restructuring stems from the Rs 3 lak 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,” says India Ratings.

It also says that the revised definition of micro, small and medium enterprises has enhanced the access of freshly included entities to funding from the financial system. 

According to India ratings, 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.

The production and consumption of steel have been improving month-on-month, backed by an increase in demand, reflecting in its prices. The automobile industry also grew 6% year-on-year on 31 December 2020, aided by the festive demand, thus imbibing confidence in the small-medium scale auto dealers and OEM manufacturers. 

India Ratings believes 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, it 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 India Ratings 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.