Tag: S&P Global Ratings

RBI showing serious commitment to improve governance, transparency in finance cos, banks: S&P

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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S&P Global Ratings on Tuesday said India’s financial system regulator, the RBI, is showing serious commitment to improving governance and transparency in the sector.

The recent measures by the RBI will curtail lenders’ over-exuberance, enhance compliance culture, and safeguard customers, but the drawback will be higher capital costs for institutions.

RBI’s measures include restraining IIFL Finance Ltd and JM Financial Products Ltd from disbursing gold loans and loans against shares, respectively, and asking Paytm Payments Bank Ltd (PPBL) to stop onboarding new customers.

In December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages, S&P said. These actions are a departure from the historically nominal financial penalties imposed for breaches, it added.

“India’s regulator has underscored its commitment to strengthening the financial sector,” said S&P Global credit analyst Geeta Chugh. “But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions.”

According to S&P, the RBI has diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues.

India’s financial system regulator, the Reserve Bank of India (RBI), is showing a serious commitment to improving governance and transparency at finance companies and banks, it said.

“Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” Chugh said.

The RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities. The central bank has also become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. It has cited perfunctory credit underwriting, overvaluation of collateral, and governance issues in select financial sector companies, S&P said.

“We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” Chugh said.

S&P said some retail loans, such as personal loans, loans against property, and gold loans, may be diverted to invest in stock markets. It is difficult to ascertain the end-use of money in these products, but market participants believe that the RBI and market regulator, the Securities and Exchange Board of India want to protect small investors by scrutinising these activities more cautiously.

“We expect the regulatory actions to drive banks and finance companies to better focus on policies and processes, ultimately enhancing the operational resilience of the system. “However, this shift is likely to lead to increased compliance costs for the sector. This may curb the ability of smaller companies to compete in the market,” S&P said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Vedanta Resources downgraded to ‘CCC’ with creditwatch negative as bond maturity nears

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Credit rating agency S&P Global Ratings on Friday (September 29) downgraded Vedanta Resources to CCC from B- and placed the company on CreditWatch Negative due to growing concerns surrounding the impending maturity of its significant bond in January 2024.

This comes after Vedanta Ltd approved a spin-off of its metals, power, aluminium and oil and gas businesses into separate listed entities and an overhaul of a lucrative zinc unit planned as part of value creation and reducing debt load.

Vedanta Resources is engaged in discussions with bondholders to address its substantial bond maturities, totaling approximately $3 billion, with a notable $1 billion payment due early next year.

While Vedanta Resources is actively working to avert a payment default, the proximity of the bond maturity has increased the likelihood of the company pursuing a liability management exercise, the rating agency said.

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The firm has already initiated talks with bondholders to address this financial challenge. However, S&P Global Ratings highlights that such a liability management transaction could be viewed as distressed, emphasizing the risks posed by Vedanta Resources’ limited alternative funding sources.

Although Vedanta Resources has partially mitigated the bond maturity issue through a 4 percent stake sale in subsidiary Vedanta Ltd in August, there remains an unfunded gap of approximately $600 million.

Closing this funding gap may necessitate actions such as transferring general reserves to retained earnings at subsidiary Hindustan Zinc Ltd or further asset sales, S&P Global Ratings said.

Furthermore, the company faces additional large bond maturities following the January 2024 deadline, making liability management a potentially preferable option compared to immediate payment.

The ultimate rating outcome will depend on the nature and terms of the liability management proposal, with S&P Global Ratings indicating that adequate offsetting compensation would be required for the exercise not to be classified as distressed, it said.

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The CreditWatch Negative status underscores the heightened likelihood of Vedanta Resources embarking on a potentially distressed liability management transaction, given its substantial upcoming debt maturities.

In the event that such a transaction is deemed distressed, the rating would be lowered to ‘SD’ upon completion and subsequently adjusted to reflect the company’s altered capital structure and liquidity, the agency added.

Shares of Vedanta Ltd ended at Rs 222.50, up by Rs 14.25, or 6.84 percent on the BSE.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Governance at Adani Group has a ‘moderately negative effect’ on ratings, says S&P Global Ratings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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S&P Global Ratings’ stance on the Adani group shall be determined by the group’s efforts to improve governance and funding over the next 24 months. On 22^nd March, it released a report titled ‘Credit FAQ: Adani Group: The Known Unknowns’, which highlights the downside risks to the Adani group’s ratings.

This includes restricted access to funding, slip ups in corporate governance, a probe uncovering “serious wrongdoing” or previously undisclosed related-party loans, cash leakages, etc. The ratings agency further adds that it is likely to take a negative rating action should any investigation uncover serious wrongdoing.

In early February 2023, S&P Global ratings revised the rating outlook on two Adani Group entities to negative, to reflect the governance risks and funding challenges of the wider group. The purpose of this report is to highlight to investors, the reasons for rating action, and the watch points and timeline for the negative outlook.

The group aims to refinance a US$4.5 billion bridge loan by the end of 2023, to buy Ambuja Cements Ltd. and ACC Ltd. S&P Global Ratings says the terms of any longer-term loan to refinance the acquisition loan would signal the funding appetite of domestic and international banks to lend against cash flows from operating entities. It shall also review the group’s ability to raise equity and debt, both via private placement or through public debt markets.

If allegations of illegal activities or misconduct at the shareholder level prove true, the ratings agency would have a more negative view of the governance of group entities. This is because the ownership of most Adani Group entities is held by the same promoters, related-family entities, and trusts.

Adani Group companies have significant recurring transactions with related parties in regular business. This include Adani Ports’ provision of ports services on a chargeable basis to Adani Enterprises Ltd., and Adani Electricity’s fuel procurement from Adani Green Energy based on public tender.

Also, there are unusual material transactions with potential credit exposure. This includes certain transactions by Adani Ports which exposes it to counterparty credit risks, such as providing loans and inter-corporate deposits to external entities, which can expose the company to potential payment defaults and delays.

The lack of lumpy debt maturities in 2023 and staggered debt maturities over the next few years reduce the immediate liquidity and refinancing risks for the entities that S&p Global Ratings rate. Based on information provided by management, no Adani Group firm that it rates has material refinancing needs in 2023. All appear to have adequate available funds to meet their near-term debt maturities. In addition, Adani Ports and Adani Electricity will likely generate healthy operating cash flows and maintain flexibility in adjusting capex, based on funding availability.

Rated Adani Group entities significantly rely on dollar bonds and access to dollar markets, and the cost of this funding is important. Current difficult market conditions and the sharp rise in U.S. interest rates have already severely limited issuance of U.S. dollar debt for all Indian companies, including Adani Group. Further, S&P Global Ratings says Adani project finance ratings were unchanged because the ring-fenced structure of these financings and the availability of security packages and cash flow waterfalls protect creditors from wider Adani Group-related risks.

What supports the current investment-grade rating on Adani Electricity is its regulatory framework with assured return on equity and full recovery of costs and capital spending that shall support earnings stability. Likewise, what supports the current investment-grade rating on Adani Ports is the expectation that its net debt-to-EBITDA ratio shall stay below 4x. Accretive cash flows from assets acquired and better operational performance should help ensure leverage stays below this threshold.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Large companies’ assets at growing risk of climate impact – S&P Global

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Over 90 percent of the world’s largest companies will have at least one asset highly exposed to the physical impacts of climate change by the 2050s, data and analysis from index and ratings provider S&P Global showed on Thursday.

From heatwaves to floods, extreme weather events are increasingly causing upheaval across the globe, pushing companies and investors to seek to better understand and measure the risks to their assets.

If the world continues on the same path as it is now and fails to rein in climate-damaging emissions, 98 percent of the largest companies — classed as those in the S&P Global 1200 index — could be highly exposed by the 2090s, it added.

However, if the Paris Climate Agreement goal of limiting global warming to less than two degrees Celsius is reached, the share of large firms with assets at high physical risk could be reduced to 39 percent over that period.

“Investors and companies are seeking advanced analytics to respond to the financial impact of climate change. Essential to this, is the ability to quantify the financial impact of climate change at the asset level to enable meaningful mitigation and adaptation planning,” James McMahon, Chief Executive Officer of The Climate Service, part of S&P Global, said in a statement.

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Using climate models that simulate the physics, chemistry and biology of the atmosphere, lands and oceans, S&P said it was able to evaluate the risk for more than 20,000 companies and over 870,000 asset locations, scoring each on a zero to 100 scale.

By the 2050s, each company would have at least one asset with a score of over 75, which is considered to be at significantly high risk from extreme heat, extreme cold, wildfire, water stress, drought, coastal flood, fluvial flood and tropical cyclone.

After scoring an asset for physical risk exposure, S&P is then able to calculate the financial impact, allowing companies to adapt their exposure, it said.

“In simple terms, this dataset allows companies and investors to understand their climate risks — and, vitally, what they could cost,” McMahon said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Second COVID-19 wave may derail India’s budding recovery: S&P Ratings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India’s second COVID-19 wave may derail a strong recovery in the economy and credit conditions, while the possibility that the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability, says a report by S&P Global Ratings.

The country’s rate of daily new infections keeps spiraling upward, accounting for almost half of the world’s cases, overwhelming the Indian health system.

“The Indian recovery had been so vigorous across many measures, particularly in the last quarter of fiscal 2021, and yet the latest outbreak has escalated rapidly,” said S&P Global Ratings credit analyst Eunice Tan.

“Despite being the largest vaccine manufacturer in the world, India’s vaccination rollout to the country’s very large and largely rural population has proven challenging,” he noted.

The central government has avoided rolling out another nationwide lockdown, given this would be unpopular and economically costly. However, authorities have already imposed local lockdowns that cover much of the country, including Mumbai, New Delhi, and Bangalore.

The scope of lockdowns affects mobility, and is indicative of the strength of India’s recovery, the report said.

S&P Global Ratings looks at two scenarios at how this might play out across sectors. Its severe scenario holds that new infections peak in late June 2021, while its moderate scenario posts that infections peak in May.

“India’s second wave has prompted us to reconsider our forecast of 11% GDP growth this fiscal year. The timing of the peak in cases, and subsequent rate of decline, drive our considerations,” said S&P Global Ratings Asia-Pacific chief economist Shaun Roache.

S&P Rating’s moderate scenario suggests a hit to GDP of about 1.2 percentage points. This means full-year growth of 9.8 percent for fiscal 2022. This compares with its baseline forecast of 11.0 percent growth for the period, set in March 2021.

In the severe scenario, the hit is 2.8 percentage points, with a growth of 8.2 percent, it said.

“The depth of the Indian economy’s deceleration will determine the hit on its sovereign credit profile. The Indian government’s fiscal position is already stretched. The general government deficit was about 14% of GDP in fiscal 2021, with net debt stock of just over 90% of GDP,” the rating agency report said.

However, the agency also pointed out that the Indian companies were going into this second COVID wave with much improved operating and liquidity conditions than they did going into the first wave, last year.

As such, the agency expects the credit profile of Indian corporate entities to be resilient to India’s second COVID wave.

“The second wave may challenge an otherwise strong recovery for Indian infrastructure. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevated,” the report added.

The agency also believes that India’s domestic banks continue to face high levels of systemic risk. In the moderate downside scenario, the Indian banking system’s weak loans should remain elevated at 11 percent-12 percent of gross loans.

It expects credit losses to remain high in fiscal 2022 at 2.2 percent of total loans, before recovering to 1.8 percent in fiscal 2023,” the report said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

India’s recovery gaining steam, estimate recovery at 10% in FY22: S&P Global

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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S&P Global Ratings on Tuesday said it estimates India’s economic recovery at 10 percent in FY22. The flattening of the COVID-19 curve, rise in government spending and better performance from the agriculture sector have placed the country on the path of economic recovery in the financial year 2021-2022, it said.

Consistently good agriculture performance, flattening of COVID-19 infection curve and pick up in government spending are supporting the economy, it said.

The global rating agency also noted that India needs many things to be right for its recovery to continue. This includes the need to quickly and thoroughly vaccinate most of its 1.4 billion people.

“Emergence of more contagious COVID-19 variants with the potential to evade vaccine-derived immunity pose a major risk to the country’s recovery,” the agency said.

Further, the possibility of early withdrawal of global fiscal stimulus also poses a major risk to India’s recovery, it added.

However, it is of the view that India’s near-term prospects are positive while the recent Union Budget 2021-2022 will also support the economic recovery.

Meanwhile, the prospects of improving growth is critical to its ability to sustain higher deficits. S&P estimates India to face a permanent loss of about 10 percent of GDP output versus its pre-pandemic path.

A sustained corporate earnings rebound is key for ratings to stabilize, the agency said. It estimates the banking system’s weak loans ratio at 12 percent of gross loans and credit cost to remain elevated at 2.2 percent-2.7 percent.

S&P believes that faster economic recovery, government and RBI measures cushioned the effect of the crisis on bank balance sheets. It expects India’s banking system’s performance to start improving materially in FY23.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

India’s budget shot in the arm for economy, fiscal consolidation takes a back seat: S&P Global

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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S&P Global Ratings on Tuesday said India’s budget for the next fiscal is an effort of the government to shore up economic recovery, but fiscal consolidation would pose a stout challenge to policymakers going forward. The rating agency currently does not see any material effect from the budget on India’s key credit factors, but the economy’s brightening growth prospects will be critical to maintaining the sustainability of public finances.

It said general government debt is likely to hover at more than 90 percent of GDP over the next few years. Stating that fiscal consolidation has taken a back seat in the Budget, S&P said aggressive provisioning to help heal the economy will be costly. The government’s 9.5 percent fiscal deficit projection for the current fiscal was bigger than the US-based rating agency’s expectation.

”The prospect of consolidation from these heights, while maintaining a significant degree of support for the economy, poses a stout challenge to India’s policymakers. The government will seek to balance its spending imperative against its limited fiscal headroom by consolidating its finances at a much slower pace than it planned prior to the pandemic,” S&P said in a statement. The government has announced a fiscal deficit glide path to lower fiscal deficit to 4.5 percent of GDP by fiscal 2025-26. ”India’s budget for fiscal 2022 (ending March 31, 2022) represents a comprehensive effort by the central government to shore up the country’s nascent economic recovery. But the brawny spending programme also entails higher-than-expected general government deficits,” S&P said.

S&P had last month revised upward its forecast for India’s real GDP growth to (-)7.7 percent for fiscal ending March 31, 2021, from (-) 9 percent previously but said it will take a long time for India’s economy to heal from the pandemic. ”We estimate that GDP per capita will fall below USD 2,000 in fiscal 2021, and that the broader economy will only recover to its pre-COVID output level in the next fiscal year. Nevertheless, India’s economy is clearly building momentum, and we forecast real GDP growth of 10 percent in fiscal 2022 as activity resumes and the country continues to reopen,” it said.

Amid uncertainty over enduring pandemic-related risks, the government’s fiscal 2022 budget includes a variety of measures that should aid the economy in getting back on track. These include a much higher expenditure allocation to healthcare, up 137 percent compared with fiscal 2021, as well as productivity-enhancing investments in transportation infrastructure, powering a 26 percent rise in capital expenditure. S&P said the budget’s emphasis on capital expenditure marks a noteworthy shift, and higher investment in India’s physical infrastructure should help to raise investment potential and competitiveness in the economy over time.

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”India’s consistently strong real GDP growth is an important support to the sovereign ratings, and the government’s efforts to fortify growth prospects should help to maintain the economy’s healthy long-term prospects… Sustained high deficits could also distort capital allocation, pressuring private sector investment,” it added. The US-based agency estimates general government’s net stock of debt will surge by about 18 percent to 92 percent of GDP by the end of fiscal 2021. It said the Indian government’s Rs 20,000 crore capital allocation for public sector banks is sufficient for now.

The government also announced in its budget that it will look to establish a ”bad bank” to manage lenders’ troubled assets, the agency said. ”This, alongside a strengthening of the National Company Law Tribunal framework, could in principle benefit banks by ensuring that management bandwidth is not spent on recoveries from weak credits.” ”Likewise, we believe that the resolution of troubled assets could be faster with weak assets consolidated in a single entity, rather than multiple banks negotiating resolution terms,” S&P added.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

S&P betters India growth forecast to (-) 7.7% this fiscal

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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S&P Global Ratings on Tuesday raised India’s growth projection for the current fiscal to (-) 7.7 percent from (-) 9 percent estimated earlier on rising demand and falling COVID infection rates. ”Rising demand and falling infection rates have tempered our expectation of COVID’s hit on the Indian economy. S&P Global Ratings has revised real GDP growth to negative 7.7 percent for the year ending March 2021, from negative 9 percent previously,” S&P said in a statement.

The US-based rating agency said its revision in growth forecast reflects a faster-than-expected recovery in the quarter through September. For the next fiscal, it projected India’s growth to rebound to 10 percent. India’s gross domestic product fell 7.5 percent in the July-September quarter, against a contraction of 23.9 percent in the April-June quarter.

S&P said India is learning to live with the virus, even though the pandemic is far from defeated and reported cases have fallen by more than half from peak levels, to about 40,000 per day. The feared resurgence following the recent holiday season has yet to materialise. ”It is no surprise that India is following the path of most economies across Asia-Pacific in experiencing a faster-than-expected recovery in manufacturing production,” S&P Global Ratings Asia-Pacific chief economist Shaun Roache said.

Manufacturing output was about 3.5 percent higher in October 2020, compared to the year-ago period, while the output of consumer durables rose by almost 18 percent. ”This recovery underscores one of the more striking aspects of the COVID-19 shock — the resilience of manufacturing supply chains. Again, as with demand, some slowing of output momentum has emerged more recently,” S&P said.

Earlier this week, Fitch had revised its growth forecast for India to (-) 9.4 percent, from (-) 10.5 percent on signs of economic revival.

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3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Indian Banks’ financial strength will not materially recover until FY23: S&P Global Ratings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Rating agency Standard & Poor’s expects the Indian banking sector’s bad loans to rise to 10-11 percent over the next 12-18 months, up from 8 percent as of June 30, 2020. The latest forecast is lower than the earlier one of 13-14 percent, and factors in resumption of economic activity, government’s credit guarantee scheme for MSMEs and buoyant liquidity. But the agency warned that it would take at least another two years before the financial sector’s regains its strength.

“Our NPL estimates are lower than previous but we are still of the view that the sector’s financial strength will not materially recover until fiscal 2023 (ended March 31, 2023),” it said in a recent report.

S&P believes that Reserve Bank’s one-time restructuring scheme is helping mask the problem assets for Indian banks arising from COVID-19. It expects 3-8 percent of the banking sector’s loans could get restructured.

“They (banks) and other financial institutions will likely have trouble maintaining momentum after the proportion of nonperforming loans (NPL) to total loans declined consistently so far in 2020,” S&P said.

“While financial institutions performed better than we expected in the second quarter, much of this is due to the six-month loan moratorium, as well as a Supreme Court ruling barring banks from classifying any borrower as a non-performing asset,” said S&P Global Ratings credit analyst Deepali Seth-Chhabria.

The agency expects the banking system’s credit costs will remain elevated at 2.2-2.9 percent this year and next.

However, what’s worrying is that collection rates, which improved sharply in the second quarter to an average 95 percent, may also wane as per the rating agency.

“This trend is aided by the pickup in economic activity since lockdowns in the country ended and, in many cases, by the savings of the borrowers. Given that overall economic activity levels remain soft, savings could deplete fast, potentially hurting future collections,” it said in its report.

Banks and nonbank financial companies (NBFCs) have also been strengthening their balance sheets and bolstering their equity bases. These reserves and excess COVID provisions might help them smooth the hit from COVID-related losses, S&P said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow