As DCHL raised large sums of money — lenders claim the company borrowed in excess of Rs 4,300 crore in the 15 months ending June 2012 — CARE assigned the highest ratings to most financial instruments of the company. The agency continued to maintain the highest rating of A1+ to DCHL’s short-term instruments until July 2, 2012, although the Hyderabad-headquartered listed company had already defaulted on short-term debt raised from several lenders almost a week earlier on June 26.
The number of DCHL’s lenders in despair is so widespread that, ironically, it has also enveloped Canara Bank, which owns 22.81 per cent of CARE and is its second-largest stakeholder-promoter. Canara Bank lent about Rs 400 crore to DCHL in the last financial year. Another dozen-and-a-half banks and financial institutions are in the same boat.
DCHL defaulted on its short-term non-convertible debentures (NCDs) on June 26, 2012. It took CARE almost a week to revise the ratings. On July 2, it revised the company’s long-term bank facilities from AA to B and put it under “credit watch”, and short-term bank facilities from A1+ to A4, putting that under “credit watch” as well.
The short-term instruments amounting to Rs 200 crore outstanding were revised from A1+ to D.
“This was one of the rarest case where short-term highest rating was downgraded to D (default grade) within a couple of weeks of re-affirmation,” said a brief prepared by a group of lenders for the government.
The next day, on July 3, CARE withdrew the rating assigned to the proposed long-term non-convertible debentures aggregating to Rs 400 crore. In less than three weeks, the agency finally suspended the ratings assigned to bank facilities and instruments of DCHL.
But the eight-month silence had already done its damage. Since DCHL’s ratings review done last on November 7, 2011, CARE acted only after the company defaulted on payments. The chief of a rival agency said that they review ratings of short-term instruments of listed companies at least once a year, but keep a tab on the company’s cash flows through the year.
Even in its November 2011 review, CARE noted that the rating was constrained by higher collection days leading to stretched working-capital cycle, loss-making divisions (viz IPL franchisee and retail business) leading to a decline in profitability margins and inherent industry risk. But it kept the ratings intact.
“Since DCHL is a listed company, quarterly results are an important source of data monitored by CARE for the purpose of surveillance. For all four quarters of FY12 the company reported profits,” a CARE spokesperson said in an email response to questions from The Indian Express.
“DCHL also confirmed cash balance/ fixed deposits of Rs 372.34 crore as on December 31, 2011 and Rs 356.97 crore as on March 31, 2012. While the gross cash accruals had reduced during FY12, the financial and cash position of DCHL continued to remain strong. No adverse feedback was received from any institutional investors/ bankers,” the agency said.
In the 15 months between April 1, 2011 and June 30, 2012, the company went on a borrowing spree, raising funds from various banks and financial institutions under many heads such as working capital requirement, term loan, short-term non-convertible debentures and even as credit facilities. While the banks are stuck with their exposure to the firm — funds raised by DCHL with the rating assigned by CARE — the agency remained clueless.
“As is normal for any rating agency, CARE also asked for more information from the company and reasons for sudden drop in its liquidity position. However, the company stopped communicating with CARE at that point in time and hasn’t replied to any of the queries raised by CARE. The FY12 annual accounts were also not available,” said CARE. “In these circumstances CARE had no choice but to suspend the ratings assigned to DCHL as it was not in a position to monitor the ratings and give meaningful information to the investors.”
You can not call it anything else. The rating agencies have failed to perform their duties world over due to lack of monitoring. Also, the banks credit analysis is questionable, as they could not spot the blot. I think the disclosures on account of INDIAN CORPORATES is just sham.
... Unless there are big symptoms, these agencies also just go with some arbitrary feeling, not pure mathematical models, in order to rate companies. This is a very dangerous trend. But why do financial institutions not ask what the funds are going to be used for? And what is the business plan behind these huge borrowings?