Rating Watch

Excerpts of credit rating actions of companies over the last couple of months.

CRISIL downgrades DLF

“CRISIL has downgraded its ratings on the debt programmes and bank facilities of DLF Ltd (DLF) to ‘CRISIL A/Negative/CRISIL A2+' from ‘CRISIL A+/Stable/CRISIL A1' w.e.f Dec 27, 2011.”

“The downgrade has been driven by CRISIL's belief that DLF's debt levels will remain high and that the weak business environment will result in moderate operating cash flows, leading to weak debt protection metrics. DLF's debt levels will remain higher than CRISIL's earlier expectations because of delay in divestment of non-core assets.”

“Furthermore, the weak business environment will continue to dampen the outlook for the real estate sector in the near term. This, coupled with the high debt levels, is expected to lead to the company's weak debt protection metrics. The ratings reflect DLF's healthy business risk profile and financial flexibility. These rating strengths are partially offset by the company's high debt levels resulting in weak debt protection metrics, and susceptibility to risks and cyclicality inherent in the real estate sector.”

“DLF has very high debt levels, which increased to around Rs 255 billion as on September 30, 2011, from Rs 240 billion as on March 31, 2011. The increase in borrowings is a result of slower new project launches, investment in strategic land acquisition, and delay in recovery from non-core asset divestments.”

“DLF has unlocked Rs 35 billion from divestment of non-core assets over the past two and a half years and has identified a portfolio of non-core assets aggregating to Rs 60-70 billion, for divestment over the medium term.”

What this means

“Instruments with ‘Crisil A' rating (for long-term instruments) are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.” Nevertheless, the comparative standing of DLF among all ‘CRISIL A' rated instruments has come down, post-downgrade. Secondly, if a rating agency changes outlook to ‘negative' from ‘stable', the possibility of future downgrades rise. Rating downgrade increases the cost of borrowing for a company from the debt market. DLF's short-term rating was also downgraded.

ICRA revises Karnataka Bank's long-term ratings downwards

“ICRA has revised the ratings to the Rs 350 crore Lower Tier II bonds of Karnataka Bank Limited to [ICRA]A from [ICRA]A+ with a stable outlook w.e.f. Jan 16, 2012.”

“The rating revision on the long term scale factors in the continued deviation in Karnataka Bank's key financial indicators as compared with peer banks rated at similar levels following the sharp deteriorating asset quality indicators (marked by slippages in a few large accounts) and continued pressures on interest margins due to large investments into the RIDF bonds (for shortfall in meeting priority sector norms).”

“KBL suffers from high NPA levels in its top industry exposures – infrastructure, textiles & gems & jewellery as well as Microfinance and agriculture”

“The provisioning cover (provisions + technical write offs) for the bank stands at 60 per cent which is lower than the systemic average. KBL's restructured assets stand at Rs 954 crore or approximately 5 per cent of the overall gross advances. Bulk of these restructured assets belongs to the textile sector. According to the bank, these advances are performing according to the restructuring terms and conditions and are classified as standard assets.”

What this means

“Instruments with [ICRA] A rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.” The revision from A+ to A would again mean comparative standing of Karnataka Bank among all ICRA A rated companies has come down.

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