Terming “over-leveraging” as the biggest drag on a company's credit profile, global ratings major Fitch’s Indian unit head has said that questions are being raised about debt-servicing capabilities of many firms here.
“I think that most of the Indian companies have seen rating downgrades in the recent past due to over-leveraging,” said Atul Joshi, managing director and CEO, India Ratings. “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.”
“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,” said Joshi. “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. 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 added.
He also 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.”