R-Capital was recently IC-Ratings Association downgraded. What does that mean and how can we use this information?
Why the rating is important:
The IC-Ratings Association forum comprises of representatives from commercial banks, leading institutions in investments and finance, and companies in financial services to benchmark and rates the invest ability factor. It is an independent company listed on stock exchanges both in Mumbai and nationally, as it is a public limited company.
The ratings are used by Moody’s who offer services to investors, technical and financial services globally to companies, training, research, concept management, spotting capital market trends, and providing investor service, product ratings. Moody’s is also the largest stakeholder on the rating agency.
The ICRA rating:
The rating is crucial to the common investor because
- It gives comprehensive company information.
- Provides users of the rating a wider field to choose investments and products from the capital and money markets.
- Enable company fundraising from a wider market.
- Assist the monitoring agencies to ensure measurability of performance and transparency in the rating process.
- Aids intermediaries and institutions in the fundraising process.
The recent downward rating of Rel-Capital by ICRA to A4 from A2 has several negative connotations. The Brickwork and CARE ratings also put them on a watch-list for credit implications that can only be negative for Reliance. The key subsidiaries of Reliance HFL and Reliance CFL were also mentioned as having a negative impact on the financial position while the profile of liquidity stands weakened and Reliance itself faces rating revisions.
Here is the lowdown on the rating factors.
- The Anil Ambani led group has been impacted by the slow monetization of its services and businesses in the non-financial market thus impacting liquidity which is stuck in investments that are non-core in nature.
- The critical subsidiaries of Reliance in the Home and Commercial Finance sectors are also stressed. This means that the inflow of money is lower than the debts incurred and due for repayment considering their position over the coming six months.
- The funds need to be brought in by rapid disinvestments in the assets held by the non-core and core segments of their business and imply that the fund inflow expectations were unrealistic and much higher than the true position. The most critical factor will be whether they can raise these funds in time and pay off the accumulated debts in time. These issues point to huge borrowings and lack of flexibility in capital management.
- Though management confidence is keeping the situation afloat there is no transparency in the funds-recovery positions of capital advanced to and obtained from Rel-Capital, Rel-Commercial Finance, and Rel-Home Finance. Thus the criticality of the fund's position and repayment capacity remains unclear.
In response to being downgraded as a good investment choice, the company claimed that the rating was inappropriate and unjustifiable mainly because none of the parameters of operation used for rating had actually changed. They claimed the rating had accounted for Rs 950 crore being the outstanding debt to be repaid by the 30th of September this year and that this was a mere commercial on-paper transaction which did not affect its liquidity position.
Further, they claimed it would be converting into money its Rel-LAM with Nippon at the present valuation of the market to raise Rs 5,000 Cr and includes a 42.88% holding which is earning a good premium on disinvestment. It has also approached SEBI with their prospectus and plans to monetize the holdings in Rel-General Insurance wherein they have a stake-hold of 49%. Speaking more about their monetization drive they also indicated that they would cut by half their debt-servicing demands and raise a total capital of 10,000 Cr Rs in total to regain their ratings.
The Reliance group of companies appears to be in a grave financial crisis with mounting debts and a debt restructuring and monetization program that will take far too long. The debtors may push hard and lead the company to file for bankruptcy.
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