CRISIL Credit Conversations Volume 1: November 2014

Given the recent focus on the quality of credit environment in India, we thought it would be worth our while to engage with key stakeholders in the space. Credit Conversations is a step in this direction.

Through this newsletter, we intend to initiate conversations on noteworthy developments in the credit space on a regular basis. Do feel free to reach out to us and discuss the issues highlighted here further.

October rain and pain After days of scorching heat, a surprise drizzle and Consequently, CRISIL downgraded its ratings on three some breeze did cool things down for Mumbai in companies (Jindal Steel & Power, Adani Mining and October. It was a more eventful month for credit, Mandakini Coal), and revised its outlook on two though. companies to ‘Negative’ (Hindalco Industries and Trans Damodar Coal Mining). Annexure 1 has a complete list of rating actions. Getting hauled over the coals Some ratings, such as those on Balco, were not The de-allocation of 218 coal blocks by the Supreme affected because supplies from coal blocks under Court, including more than 40 productive mines and six development were not factored in our assessment of its nearly productive ones, impacted power companies, credit. metal manufacturers, and mine developers and operators (MDOs). The credit impact was more severe We continue to monitor the developing story of the on companies with operational mines because upcoming coal auction process and will be assessing suddenly, they were facing challenges of business its impact. integration, cost spikes, and weakened liquidity. CRISIL Credit Conversations

First whiff of improving corporate Near-term respite for banks on Basel- credit quality III liquidity norms

Our recent bi-annual study, ‘CRISIL Ratings Round- In response to the Reserve Bank of India’s monetary Up’ showed that for the first time in the last 30 months, policy announcement on the revision in Basel-III the credit ratio exceeded 1, meaning upgrades guidelines on liquidity coverage ratio (LCR), we outnumbered downgrades. published an analysis, ‘Breather for banks on Basel-III liquidity norms’. The credit ratio improved dramatically to 1.64 for the first half of the current fiscal compared with 0.79 seen in This revision allows banks to include a higher share (7 the same period last fiscal. But this was driven by a per cent of net demand and time liabilities, up from 2 per disproportionate improvement in the credit quality of cent earlier) of their government security holdings firms that operate in the non-discretionary consumer under their statutory liquidity ratio, or SLR, investments, as a part of what’s called high-quality liquid assets, or segment, have a presence in the export markets, or HQLA. We believe this should help most banks have low leverage and are showing better profitability. comfortably meet their LCR requirement of 60 per cent On an overall basis, systemic credit quality remains by January 2015. But it may not be adequate in the fragile, and firms with high debt continue to face longer term. A deepening of India’s corporate bond liquidity pressure. The ratio of debt at firms that were market is critical if banks are to meet the LCR upgraded compared with those downgraded came in requirement of 100 per cent by January 2019. weak at 0.59 in the first half. Any improvement in credit quality will be gradual and Rating assignments and movements linked to the pace of policy reforms. Recently, we assigned the first rating to a Chinese bank – ICBC - in India. We also rated a large hybrid bond Scratching heads over an issue (under Basel III) of IDBI Bank, and a fixed-deposit programme of BNP Paribas. interpretation of the Companies’ Act Among upgrades, Mahindra & Mahindra was upgraded If I tell you that the new Companies’ Act, 2013, which to ‘CRISIL AAA’ after more than a decade. The rating on has introduced several features to protect investors, DLF was placed on ‘Watch with negative implications’ also allows a company to extend the repayment of after the Securities and Exchange Board of India’s principal on maturing fixed deposits by up to a year, will order (Annexure 3). It will be pertinent to highlight here you believe me? You had better. We, too, are that the ratings on commercial mortgage backed securities issued by DLF’s subsidiaries were not scratching our collective heads over it. impacted given the inherent structural features that The story in a nutshell: Last month, CRISIL placed the allow dissociation with the parent. rating assigned to the debt instruments of Helios & Annexures 2 and 3 contain details of a few noteworthy Matheson Information Technology on ‘Watch with rating assignments and movements. Negative Implications’ (in addition to downgrading its ratings). This was because the company has extended I hope you find this newsletter beneficial. Do write to me the repayment date of fixed deposits (not rated by about your views and topics of interest. CRISIL) that were due this fiscal, citing the interpretation of a section in the new Companies’ Act.

We are in the process of obtaining an independent external legal opinion on the interpretation. We are also writing to the Ministry of Corporate Affairs to seek Pawan Agrawal Senior Director, CRISIL Ratings clarity on the matter. Email: pawan.agrawal@crisil.com

2 Annexures

Annexure 1: Rating changes following coal verdict Name Rating outstanding as on date Rating action on verdict

Adani Mining Pvt Ltd CRISIL BB+/Negative Downgraded by one notch; outlook changed to ‘Negative’ from ‘Stable’ Hindalco Industries Ltd CRISIL AA/Negative/CRISIL A1+ Outlook changed to ‘Negative’ from ‘Stable’

Jindal Steel & Power Ltd CRISIL AA-/Stable/CRISIL A1+ Downgraded by one notch

Mandakini Coal Company Ltd CRISIL A4+ Downgraded from CRISIL A2; continues on ‘Watch Negative’

Trans Damodar Coal Mining (P) Ltd CRISIL BBB-/Negative/CRISIL A3 Outlook changed to ‘Negative’ from ‘Stable’

Annexure 2: New Ratings Assigned

Name Rating assigned

Axis Bank Ltd – Infrastructure Bond issue CRISIL AAA/Stable BNP Paribas FAAA/Stable/CRISIL A1+ IDBI Bank Ltd – Additional Tier I bond issue (under Basel III) CRISIL AA-/Stable Industrial and Commercial Bank of China Ltd (ICBC) CRISIL A1+ L & T Technology Services Ltd CRISIL AA+/Stable/CRISIL A1+ Petronet LNG Ltd CRISIL AA+/Stable Raymond Ltd CRISIL AA-/Stable/CRISIL A1+

Annexure 3: Key rating movements Rating outstanding Name Rating change Rationale for change as on date

DLF Ltd CRISIL A/CRISIL A2+/Watch Ratings placed SEBI order restraining DLF and its key Negative on ‘Watch executives from accessing the securities Negative’ market, directly or indirectly, for three years.

IL & FS CRISIL A/Stable/CRISIL A1 Outlook revised to CRISIL's expectation of an improvement in Transportation ‘Stable’ from ITNL's financial risk profile, driven by equity Networks Ltd (ITNL) ‘Negative’ infusions and an improving project portfolio mix.

Leap Green CRISIL A-/Stable Upgrade Healthy debt servicing coverage ratio (DSCR), Energy Pvt Ltd improving revenue diversity and established track record of the group’s wind-power assets.

Lucas TVS Ltd CRISIL AA+/FAAA/Stable/ Downgrade CRISIL's belief that the recovery in Lucas- CRISIL A1+ TVS's credit risk profile will take longer than earlier expected, given the only gradual revival in demand and moderate growth outlook for the domestic automotive industry.

Mahindra & CRISIL AAA/Stable/CRISIL Upgrade Driven by healthy business profile, improving Mahindra Ltd A1+/CRISIL GVC Level 1 revenue diversity, an expectation that M&M will (M&M) maintain a strong financial risk profile, and robust financial flexibility.

3 About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

About CRISIL Ratings CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over 75,000 entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range of debt instruments: bank loans, certificates of deposit, commercial paper, non-convertible debentures, bank hybrid capital instruments, asset-backed securities, mortgage-backed securities, perpetual bonds, and partial guarantees. CRISIL sets the standards in every aspect of the credit rating business. We have instituted several innovations in India including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We pioneered a globally unique and affordable rating service for Small and Medium Enterprises (SMEs).This has significantly expanded the market for ratings and is improving SMEs' access to affordable finance. We have an active outreach programme with issuers, investors and regulators to maintain a high level of transparency regarding our rating criteria and to disseminate our analytical insights and knowledge.

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Last updated: August 2014

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