Terming 'over-leveraging' as the biggest drag on a company's credit profile, global ratings major Fitch's Indian unit head says that questions are being raised about debt-servicing capabilities of many firms in India.
"I think that most of the Indian companies have seen rating downgrades in the recent past due to over-leveraging.
"The rating actions that happen because of cyclical reasons are not of any major concern, as the businesses that witness a downslide during a cycle also come up eventually. But that may not be the case with over-leveraged entities," India Ratings' managing director and CEO Atul Joshi said.
India Ratings, formerly known as Fitch India, is a wholly owned subsidiary of global ratings major Fitch Group.
"The over-leveraging is mostly seen in terms of debt-to- equity, but we at credit rating agencies do not look at it that way. What we look at is debt to EBITDA or the company's cash flow position, which defines the entity's earnings ability to service the debt," Joshi told PTI in an interview.
"When this ratio crosses a certain limit, the question mark arises whether it will be able to service the debt and at that time a red flag is raised.
"The debt-to-equity ratio could be a static data, so we look at the cash flow position as well to take into account the prevailing factors to decide over-leveraging," he said.
Joshi said that it is the over-leveraging by Indian companies that has been mostly responsible for negative rating actions, thus making it difficult for them to raise debts.
"Some of them have happened because of entities not being able to come back as per the cyclical trend. When you assign ratings due to cyclical reasons, you take a call that certain developments are going to take place along the lines of the economic cycle.
"They will see some downside and then again come up as per the cycle. But there will be some stray players who will not be able to come back," he said.
Further explaining the rationale behind the actions of the credit rating agencies, Joshi said: "If anything which is cyclical, whether for upside or downside, it will not call for a rating change. In other words, any good or bad performance due to some temporary factors, will not call for a rating change.
"When ratings are assigned, they take into account both the upside and downside prospects of the entity's performance. But when such cyclical things become structural or permanent in nature, whether on upside or downside, then it calls for a rating change.
"These factors could be both from inside or those related to the entity, or from the outside such as macroeconomic factors."