Credit Policy Group

www.indiaratings.co.in 24 September 2019

Default Study

Ind-Ra’s FY19 Transition and Default Study Rating Activity Turns Negative, Annual Default Rate Remains Elevated

Special Report

Figure 1

Figure 2 Figure 3

Contacts

Saurav Singh Ashwini Jani

+91 22 4035 6112 +91 22 4000 1756

saurav.singh@indiaratings.co.in ashwini.jani@indiaratings.co.in

Net Rating Activity Turns Negative: India Ratings and Research’s (Ind-Ra) corporate

finance rating activity turned negative in FY19. Since the number of downgrades

exceeded the upgrades, the upgrade-to-downgrade (U-D) ratio declined to 0.87:1 in FY19

(FY18: 1.41:1). The average U-D ratio for FY14-FY18 stood at 1.90:1. Of all the

downgrades during FY19, ~19% pertain to issuers that were non-cooperative at beginning

of year. In FY19, the U-D ratio for investment category dropped to 0.85:1 (FY18: 1.49:1)

while for sub-investment category it fell down to 0.88:1 (1.34:1).

Annual Default at 3.68%: Ind-Ra’s overall corporate finance ratings’ annual default rate

increased to 3.68% in FY19 (FY18: 3.13%, FY17: 2.01%). In FY19, investment-grade

default rate increased to 2.2 % (FY18: 1.7%) mainly because of IL&FS group related

defaults, excluding which investment-grade default rate stands at 1.6%. Sub-investment

grade default rate remained more or less similar at 4.8% (4.3%). Of all the defaults during

FY19, 74% carried a sub-investment grade rating at the beginning of the year (FY18:

76%). The average annual default rate for Ind-Ra’s corporate finance ratings over FY09-

FY19 was 2.96%. The investment and sub-investment grade average annual default

rates for corporate finance issuers over the same time period were 1.57% and 4.25%,

respectively. Annual Default rate for FY19 excluding IL&FS group related defaults stands

at 3.4%

Rating through the Cycle: Ind-Ra follows a rating-through-the-cycle approach that

factors in the probable medium-term trends of crucial macroeconomic variables such as

commodity prices, currency value, current account, demand, inflation, interest rate, etc.

While historical performances act as an input for entity-level forecasts, evolving or

expected economic conditions (domestic and global) have a significant bearing on a

rating opinion, thus making it forward looking. Ind-Ra’s ratings are opinions based on all

information known to the agency, including publicly available information and/or non-

public documents and information provided by an issuer and other parties. In issuing and

maintaining its ratings, Ind-Ra relies on factual information it receives from issuers and

underwriters and from other sources the agency believes to be credible.

0

1

2

3

0

100

200

300

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Upgrades (LHS)

Downgrades (LHS)

Upgrade/downgrade ratio (RHS)

Upgrade/downgrade ratio (investment category) (RHS)

Upgrade/downgrade ratio (non-investment category) (RHS)(Number)

Ind-Ra’s Historical Rating ActivitiesIncrement in number of downgrades, moderation in number of upgrades

Source: Ind-Ra

(Ratio)

5.03 3.61

83.88

5.44 2.040

20

40

60

80

100

-2 &below

-1 0 1 2 &above

(%)

Rating Movement – FY 2019

Note: X-axis represents notch changeSource: Ind-Ra

4.10 3.50

2.45

2.01

3.133.68

0

1

2

3

4

5

FY14 FY15 FY16 FY17 FY18 FY19

(%)

Ind-Ra’s Annual Default Rate

Note: Annual Default rate represents proportion of default ratings in the year as a percentage of the total number of non-default ratings outstanding at beginning of the yearSource: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

2

Figure 4

Figure 5 Figure 6

Figure 7 Proportion of Issuers Upgraded or Downgraded (%)

Investment grade Non-investment grade

Upgrade Downgrade Upgrade Downgrade

FY13 5.0 7.5 8.5 12.1 FY14 14.9 8.2 17.1 6.6 FY15 14.9 6.9 14.7 6.9 FY16 15.5 8.1 11.5 3.5 FY17 11.9 9.7 12.0 7.0 FY18 13.0 8.7 7.7 5.8 FY19 9.3 10.9 6.2 7.1

Note: Proportion is calculated from ratings outstanding at the beginning of the year and remained active throughout the year Source: Ind-Ra

Changing Issuer Mix and Impact on Rating Stability The changing composition of outstanding ratings also impacts rating stability. Ind-Ra’s

modal rating level transitioned into the sub-investment grade category i.e. ‘IND BB’ in

FY14 and remained unchanged in FY19. Prior to this, the rating universe was mainly

limited to debt market participants, resulting in a higher modal rating level (‘IND BBB’ from

FY10 to FY13).The transition has mainly been due to the initiation of bank loan ratings,

which has led to several small issuers being rated only for their bank facilities.

Ratings in investment-grade categories are largely driven by the strength of a business

profile, with financial profile either supporting or strengthening the business profile or, in

certain cases, constraining the ratings. On the other hand, sub-investment grade ratings

are largely driven by the strength of a financial profile and liquidity position with business

profile playing second fiddle.

Stability Rate: Ind-Ra’s overall corporate finance stability rate holds up at 89.1% in FY19

(FY18: 90.8%). During FY19, the stability rate of sub-investment grade corporates was

90.7% (FY18: 91.7%), while that of investment grade corporates declined to 87.3%

(89.8%). The gross rating movement (the number of upgrades and downgrades including

notch change as a proportion of number of ratings outstanding in the beginning of year)

for FY19 was 16.1% (FY18: 16.8%). It peaked at 23.4% during FY14. During FY19, the

proportion of downgrades within investment & sub-investment grades increased while

proportion of upgrades in both the categories fell in FY19 over FY18.

Debt Weighted Rating Activity: The overall debt-weighted U-D ratio for corporate

finance issuers remained low at 0.47:1 in FY19 (FY18: 0.56:1), largely due to five issuers

(two banks, a housing finance company, a NBFC and an infra company) collectively

accounting for ~50% of the total downgraded debt. Excluding these four issuers, the debt-

weighted U-D ratio stood at 0.90:1. During FY19, 53% of the total downgraded debt

pertains to the financial institution sector, and 23% to infrastructure, construction and real

estate sector.

During FY19, around 10% of the downgraded issuers accounted for 83% of the

downgraded debt volume while around 10% of the upgraded issuers accounted for 78%

of the upgraded debt volume. For FY19, 15% of the total upgraded debt pertains to

one issuer in the oil & gas sector, and 32% to the infrastructure, construction and real

estate sectors.

05

10152025303540

IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D

FY13 FY14 FY15 FY16 FY17 FY18 FY19(%)

Changing Composition of Ind-Ra’s Rating Universe

Note: Distribution is based on ratings which remained alive throughout the financial year. 'IND D' also include those issuerswho were in default in the beginning of the yearSource: Ind-Ra

80

85

90

95

100

FY10FY11FY12FY13FY14FY15FY16FY17FY18FY19

Investment grade

Sub-investment grade

Overall

Annual Stability Rate

Note: Annual Stability rates represents proportion of ratings that remain unchanged during the period out of ratings that remain outstanding at beginning and end of the annual period excluding changes within category.Source: Ind-Ra

(%)

0

5

10

15

20

25

FY10FY11FY12FY13FY14FY15FY16FY17FY18FY19

(%)

Rating Movement

Note: Rating movement is the number of upgrades and downgrades including notch changes as a proportion of the number of ratings outstanding at the beginning of year. Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

3

Figure 8

Sectoral Distribution of Ind-Ra’s Upgrades and Downgrades – FY19

Figure 9

Analysis of Rating Upgrades & Downgrades

For FY19, out of the total upgrades, 50% were from the investment grade categories while 49%

of the total downgrades were from the sub-investment-grade categories. 12% of the total

upgrades were from the sub-investment to investment-grade categories. In the investment-grade

categories, 24% of the total upgrades were from ‘IND BBB’ and 20% from ‘IND A’ categories

while 32% of the total downgrades were from ‘IND BBB’ and 11% from ‘IND A’ categories.

Nearly 6% of the total upgrades were from ‘IND D’ category. Of the total downgrades, 30% were

from the investment-grade to sub-investment grade categories. During FY19, eight ratings were

downgraded from ‘IND AAA’ category while three ratings were upgraded to ‘IND AAA’ category.

In addition to these three Infrastructure Debt Fund (IDF) ratings were downgraded from “IND

AAAidf-mf” category, not forming part of transition computations.

IL&FS group accounted for 6.5% of total downgrades count wise and 12% of total

debt downgraded.

Aerospace & Defence0.4%

Auto & Auto Ancillaries

4%

Cement, Chemicals & Textile

8%

Construction, Real estate & Other Infrastructure

11%

Diversified Manufacturing

9%

Diversified Services11%

Educational Institution1%

Iron & Base Metals11%

Banks,NBFC & Other Financial Institutions

2%

Food & Agro Commodities

10%

Public Finance Institution

0.0%

Oil & Gas3%

Trading3%

Healthcare & Pharmaceutical

4%

Telecom, Logistics, IT & Electronics

3%

Power & Power Distribution

3%

Renewables11% Roads

3%

Gems & Jewellery3%

Cooperative Society0.4%

Upgrades

Source: Ind-Ra

0

5

10

15

20

25

30

35

IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D

Upgrades Downgrades

Rating Category-wise Distribution of Upgrades and Downgrades – FY19

Source: Ind-Ra

(%)

Aerospace & Defence0.0% Auto & Auto

Ancillaries 2%

Cement, Chemicals & Textile

9%

Construction, Real estate & Other Infrastructure

19%

Diversified Manufacturing

10%

Diversified Services9%

Educational Institution1%

Iron & Base Metals3%

Banks,NBFC & Other Financial Institutions

5%

Food & Agro Commodities

9%

Public Finance Institution

2%

Oil & Gas0.4%

Trading7%

Healthcare & Pharmaceutical

3%

Telecom, Logistics, IT & Electronics

6%

Power & Power Distribution

1%

Renewables5%

Roads6%

Gems & Jewellery4%

Cooperative Society1%

Downgrades

Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

4

Figure 10

Among corporate ratings, a significant number of issuers that were upgraded by Ind-Ra in FY19

exhibited sustained revenue growth, strong revenue visibility, operational efficiencies and/or

improvement in the credit metrics, improved business profiles due to reasons such as favourable

industry dynamics leading to improvement in margins, and enhanced support from stronger

entities. Upgrades purely on account of improved liquidity and a reduction in debt remained few.

Corporate rating downgrades were largely driven by stretched working capital cycles leading to

poor liquidity, weakening of parents’ profile and deterioration in the credit metrics as against Ind-

Ra’s expectation due to factors such as weak financial performance, lower-than-expected

operating performance, amongst others. A significant portion of issuers in the diversified

manufacturing and diversified services sectors belong to the sub-investment grade categories

where the ratings are driven by firm-specific factors.

In the infrastructure segment, strong operational performance leading to increased coverage

ratios, improved counterparty profile(s), and timely payment after delays was the major reasons

for rating upgrades in FY19. The downgrades were driven by factors such as strained liquidity in

the absence of sponsor support, legal ruling following IL&FS’s default leading to delays in debt

servicing, and so on.

In the financial sector space, four non-banking finance companies (NBFC) were upgraded due

to reasons including, improvement in the credit profile of the parent, the strengthening of

franchise, equity infusions, diversification in borrowing mix and improved assets under

management. Factors such as impairment in the ability to sustain current position of systemic

importance, worsening standalone credit profile on account of credit costs and the loss of share

in the system’s advances and deposits led to the downgrades of instrument ratings of five public

sector banks. One private sector bank was downgraded because of its inability to scale its retail

liability franchise.

Figure 11

Two NBFCs were downgraded to default on account of sharp deterioration in the group’s

liquidity profile while three NBFCs were downgraded due to worsening of near-term liquidity

situation and the group’s strained funding profile.

In the public finance space, the ratings of five state government owned enterprises were

downgraded due to stretched liquidity. There were no upgrades.

As per a circular by The Securities and Exchange Board of India (SEBI), around 47% of

outstanding ratings remained in the non-cooperative category at end of FY19. Of these, 56%

were in non-cooperative category since FY18. Majority (87%) of these non-cooperative issuers

belongs to the sub-investment grade. Issuers migrated to non-cooperation category are

monitored based on the best available information as per the regulations and were included

while computing transition and default rates.

Defaults in FY19

3.68% of the ratings that were outstanding at the beginning of FY19 were downgraded to the

default category during the year. Of the total defaults, 74% were from the sub-investment grade

categories, 17% were from ‘IND BBB’ while 38% were from ‘IND BB’ categories. 36% of the total

defaults were from issuers whose ratings were in the non-cooperative category at the beginning

of FY19. The list of issuers that defaulted during FY19 is attached as Annexure III.

0 10 20 30 40 50 60

Sustainable growth in revenues/Strong RevenueVisibility/Operational efficiencies/Improvement in

credit metrics

Successful completion/Commercialisation ofcapacity/Improvement in counterparty profile/Work

order execution

Improvement in liquidity/Working capital management

Timely payment after delays/Successfulrestructuring/Revival

Non-investment grade Investment grade

Ind-Ra’s FY19 Upgrades – Key Reasons

Note: Reason for upgrades in financial institutions not includedSource: Ind-Ra

(%)

Improved business profile (favourable industry dynamics, strong order book, reduced raw material prices, support

from stronger entities)

0

10

20

30

40

50

0

10

20

30

40

50

60

70

IND AAA IND AA IND A IND BBB IND BB IND B IND C

Defaults (RHS) Default rate (LHS)

Rating Category-wise Distribution of Defaults in FY19

Note: Default rate: No. of defaults among rated entities in the static pool as a percentage of the total number of entities inthe static pool, where static pool comprises of non-defaulted ratings that were outstanding at the beginning of periodSource: Ind-Ra

(%) (Number)

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

5

Figure 12

Figure 13

Figure 14

Macro Perspective

Ind-Ra has revised its FY20 gross domestic product (GDP) growth expectation down to

6.7% (six-year low) from its earlier forecast of 7.3%. The key reasons for this sharp

downward revision in GDP expectation are (i) a slowdown in both urban and rural

consumption demand, (ii) industrial, especially manufacturing, growth losing momentum,

(iii) inability of the process of Insolvency and Bankruptcy Code (IBC) to resolve cases in a

time-bound manner, and (iv) rising trade tension leading to global trade growth moving

into the negative territory lately. The current economic slowdown, in Ind-Ra’s view, is a

combination of both cyclical and structural factors. It may appear to be driven by cyclical

factors which may have impacted the immediate demand such as non-banking finance

company (NBFC) problems, postponement of investment due to parliamentary election,

increased tax vigilance, etc. However, the agency believes a number of structural issues

such as (i) slowdown in urban/rural household consumption, (ii) failure to revive private

investment, (iii) delayed IBC process to unlock stuck capital, (iv) continued rigid

land/labour market, (v) sustained decline in savings rate especially household savings,

and (vi) the absence of fiscal space to step up government spending, are also plaguing

the economy.

The banking sector will remain the backbone that is likely to support credit growth in the

medium-to-long term. Currently, a large part of the sector remains mired with a number of

issues, fallout of which being manifested as high NPAs with banks requiring higher capital

thus straining the exchequer, which has emerged as a major constraint for catalysing the

private sector investment in the economy. Recently announced consolidation of public

sector banks should be positive in the long term.

While system liquidity has turned surplus due to the Reserve Bank of India’s (RBI) open

market operations purchase, capital flows and stable cash in circulation, flow of funds

within the corporate space remains a challenge, partly due to the recent liquidity crisis in

the NBFC space, exacerbated by corporate leverage that continues to be high. Ind-Ra

believes that deleveraging could take some time and any further liquidity challenges could

make the situation even more testing, though lower interest rates may provide some relief

in so far as leverage is concerned if credit becomes available at these lower rates.

Further, corporate governance has emerged as a key risk factor and a number of high

profile defaults in the recent past may be attributed to governance failures.

With both financial and corporate sectors remaining in a subdued state due to various

factors, susceptibility to external uncertainties may increase, given the increased trade

and financial linkages e.g. trade wars, portfolio flow reversals (even if temporary), volatile

commodity prices, etc.

0

2

4

6

8

10

0

5

10

15

20

25

FY99 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 July'19

Weighted average lending rates (LHS) Bank credit growth (LHS)

Corporate leverage (RHS) 10 year Gsec yield (RHS)

Bank Credit Growth vs Corporate Leverage vs Lending RatesLow lending rates coinciding with peak credit growth and rising leverage

Note: Figures in parenthesis represents NPA growth in the year, Debt/EBITDA has been taken as proxy for Corporate leverageSource: RBI, CMIE and Ind-Ra

(% yoy) (Number)

(11.5) (21.3) (24.0) (15.6) (46.0) (35.8) (35.7) (22.8) (80.0) (20.0) (30.0) (-6.9)

-5

0

5

10

15

20

69

72

75

78

81

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

CU (LHS) GDP growth (Y-o-Y) (RHS) GFCF growth (Y-o-Y) (RHS)

Note: Based on latest round of surveysSource: RBI, MOSPI and Ind-Ra

(%)

Capacity Utilisation (CU) and GDP & GFCF Growth)(%)

40

50

60

70

80

-20

0

20

40

60

80

100

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Current account deficit Net foreign direct investment

Net foreign portfolio investment USD/INR exchange rate

Indicators

Note: USD/INR rate pertains to last day of FY and monthSource: RBI, SEBI and Ind-Ra

(USD billion) (Rupee)

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

6

Figure 15 Ind-Ra’s Average Cumulative Default Rates (FY09-FY19) (%) Year One Year Two Year Three Year Four Year Five

IND AAA 0.52 0.37 0.42 0.49 0.56 IND AA 0.19 0.33 0.39 0.63 1.47 IND A 1.01 2.79 4.77 5.69 6.06 IND BBB 2.48 5.10 7.07 9.06 11.33 IND BB 3.54 6.28 8.25 10.43 11.70 IND B 4.83 8.01 9.94 12.20 14.19 IND C 23.17 20.83 17.39 19.35 20.00 Investment Grade 1.57 3.25 4.63 5.66 6.62 Speculative Grade 4.25 7.14 9.08 11.34 12.95 All 2.96 5.17 6.73 8.15 9.16

Note: The cumulative default rate (CDR) represents the likelihood of an entity that was rated at the beginning of any multi-year period defaulting at any time during the multi-year period.

CDR for rating category X = No. of issuers which defaulted over the multi-year period/static pool

Static pool comprises non-defaulted issuers outstanding at the beginning of the multi-year period

All averaging across static pools for default rate computations are based on the weighted average method where the weights are the number of ratings in each static period

During FY19, there have been 9 defaults due to IL&FS group entities (3-AAA, 2-AA, 2-A & 2-BBB). “IND AAA” default rates would have been zero excluding these.

Source: Ind-Ra

Figure 16 Ind-Ra’s One Year Long-term Ratings Transition Rates: FY19 (%) IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D Total

IND AAA 91.5 3.1 1.0 - - - 1.0 3.1 100 IND AA 1.0 94.0 4.0 - - - - 1.0 100 IND A - 6.9 86.2 3.6 0.3 - 1.3 1.6 100 IND BBB - - 4.9 85.7 5.6 0.1 0.6 3.1 100 IND BB - - 0.1 2.5 91.7 1.5 0.1 4.2 100 IND B - - - 0.2 4.3 89.7 - 5.7 100 IND C - - - - - 7.7 30.8 61.5 100

Source: Ind-Ra

Note: IND AAA Stability Rates exclude three Infrastructure Debt Funds downgraded, earlier included in transition computations. The said stability rate including these would have been lower at 88.7% had these funds been included in transition computations.

Figure 17

Ind-Ra’s Average Annual Short-term Ratings Transition Rates: FY16-FY19 (%) IND A1+ IND A1 IND A2+ IND A2 IND A3+ IND A3 IND A4+ IND A4 IND D Total

IND A1+ 96.16 2.07 0.30 0.15 - 0.30 0.15 0.15 0.74 100 IND A1 15.08 78.03 3.28 0.98 0.33 0.33 - 0.98 0.98 100 IND A2+ 1.42 13.17 72.24 5.69 2.14 1.07 0.36 2.49 1.42 100 IND A2 0.74 2.23 10.41 79.93 1.12 2.23 1.86 0.37 1.12 100 IND A3+ - 0.70 2.11 11.27 72.18 7.04 4.23 1.06 1.41 100 IND A3 - - 0.49 1.14 8.50 78.76 7.84 0.33 2.94 100 IND A4+ - - 0.05 0.05 0.35 2.84 91.38 1.79 3.54 100 IND A4 - - - - - - 6.82 88.77 4.40 100

Source: Ind-Ra

Cumulative Default Rates and Transition Rates

The average three-year cumulative default rate across Ind-Ra’s corporate finance issuers

over 2009-2019 was 6.73%.

Figure 16 shows the movement of ratings across rating categories, as against to the

modifier level, which counts each notch change. The left-hand column identifies ratings

outstanding at the beginning of FY19, while each row provides information on the

migration pattern of those ratings by end-FY19.

The diagonal value reflects the stability of each rating category. The rating stability for

issuers rated ‘IND BB’ or below over the long term is low. Lower stability at the lower end

of rating categories is due to multiple factors. The participation of lower rated issuers in

the Indian bond market is less and these issuers generally depend on banks/financial

institutions for their credit needs. Credit discipline/culture is less established with these

issuers. Smaller issuers are also more prone to adversities in the money market and

credit squeeze. The average annual transition rates and average three-year cumulative

transition rates are provided in Annexure I.

The ratings on the short-term scale mirror the movements in the long-term ratings.

The stability across the short-term scale has remained robust as depicted in Figure 17.

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

7

Structured Finance Ratings

Figure 18

Composition of Ind-Ra’s Structured Finance Ratings Universe – FY19

Note: Composition as on 31 March 2019 Source: Ind-Ra

Figure 19 Ind-Ra’s One Year Structured Finance Long-term Ratings Transition Rates: FY19

(%) IND

AAA(SO) IND

AA(SO) IND

A(SO) IND

BBB(SO) IND

BB(SO) IND

B(SO) IND

C(SO) IND

D(SO) Total

IND AAA(SO) 100.00 - - - - - - - 100 IND AA(SO) - 98.53 - - - 1.47 - - 100 IND A(SO) - 7.32 92.68 - - - - - 100 IND BBB(SO) - - 1.69 98.31 - - - - 100 IND BB(SO) - - - 20.00 80.00 - - - 100 IND B(SO) - - - - - - - - 100 IND C(SO) - - - - - - - 100.00 100

Source: Ind-Ra

Figure 20

Ind-Ra’s structured finance overall stability rate for FY19 remained robust and stood at

97.56% (1.8% upgraded and 0.7% downgraded excluding changes within category).

Please refer to structured finance performance report for further analysis.

Scope & Coverage

The analysis above comprises ABS, RMBS and CMBS ratings, a total of 391 ratings in

FY19. The study excludes short-term ratings. Non-securitised transaction ratings that

carry ‘SO’ symbol have been included in corporate finance ratings.

The average annual transition rates and average three-year cumulative transition rates for

Ind-Ra’s structured finance long-term ratings are provided in Annexure II.

ABS88%

RMBS9%

CMBS2%

LAS & LRD1%

IND AAA35%

IND AA22%

IND A19%

IND BBB23%

IND BB1%

IND B0.3%

0%

20%

40%

60%

80%

100%

IND AAA(SO) IND AA(SO) IND A(SO IND BBB(SO) IND BB(SO) IND B(SO) IND C(SO)

Upgraded Stable Downgraded PIF

Activity Across Rating Category – FY19

Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

8

Figure 21 Average Time to Default for Ind-Ra’s Corporate Finance Ratings Rating category Months to default

IND AAA 112a

IND AA 68 IND A 49 IND BBB 35 IND BB 26 IND B 24 IND C 10 a On account of default by four issuers

Note: The study covers 417 defaults which happened during 2005-2019. Source: Ind-Ra

Figure 22

Average Time to Default

Of the 417 defaults over FY05-FY19, average time to default for the investment-grade

categories was 42 months while that of the sub-investment categories was 24 months.

Gini Coefficient

For Ind-Ra’s overall ratings universe, Gini coefficient for one–year defaults between FY02

and FY19 stood at 0.43. Gini coefficient for same period excluding IL&FS’ related default

(3-AAA, 2-AA, 2-A, 2-BBB) stood at 0.45.

The Gini coefficient (also known as the accuracy ratio) is a widely used measure of

discriminatory power. It is defined as the area under the cumulative accuracy profile (CAP

curve) of the rating model in relation to the area under the CAP curve of a hypothetical

perfectly discriminating rating model. However, Ind-Ra does not follow a simple fixed

model for assigning ratings. The ratings assigned by Ind-Ra are opinions based on

established criteria and methodologies that Ind-Ra is continuously evaluating and

updating. The Gini coefficient, when being applied on Ind-Ra’s ratings, provides a

summary statistic only for a snapshot of Ind-Ra’s ratings. The Gini coefficient also

provides a measure of discrimination between defaults and non-defaults, i.e. of the ability

to differentiate relative risks. Just as Ind-Ra’s ratings do not imply or convey a specific

statistical probability of default, the Gini coefficient does not make a statement about the

ratings’ correspondence with historical default probabilities. Furthermore, ratings are not

facts, and therefore cannot be described as being accurate or inaccurate.

Correspondingly, the Gini coefficient (despite its widely used alias) does not constitute a

measure of ratings accuracy, but of a measure of degree of discrimination.

0

20

40

60

80

100

0 20 40 60 80 100

Random Ratings Perfect discrimination

Gini Coefficient for Ind-Ra’s Ratings

For one-year defaults between 2002 & 2019 across Ind-Ra's Rating UniverseSource: Ind-Ra

Cumulative proportion of defaults (%)

Cumulative proportion of rated universe (%)

(1 year Gini Coefficient (2002-2019) = 0.43)

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

9

Ind-Ra’s Transition and Default Methodology

All Ind-Ra’s ratings, comprising publicly rated, corporate, financial institutions, project and public

finance long-term issuer/issue ratings from 2009 to the present are included in transition and

default rate statistics. These do not include short-term ratings and structured finance ratings, for

which computations have been shown separately. The study includes corporates, banks,

NBFCs, subnational and infrastructure companies: a total of 3,450 corporate finance

issuer/issue ratings in FY19.

Ind-Ra employs a static pool approach in calculating its default rates. Static pools or,

alternatively, cohorts are created by grouping ratings according to the year in which the ratings

were active and outstanding at the beginning of the respective year. For example, issuers with

ratings outstanding at the beginning of 2009 constitute the 2009 cohort, with the same true for

the 2010, 2011, and additional cohorts.

Issuers newly rated by Ind-Ra in any given year are included in the following year’s cohort. For

example, the performance of ratings initiated in mid-2009 would be followed as part of the 2010

and future cohorts. Issuers migrated to Non- Cooperation (NCO) category are monitored based

on best available information as per the regulations and were included while computing stability

and transition rates.

Ind-Ra’s continuing data enhancement efforts may result in different statistics than in previously

published studies. Therefore, this most recent study supersedes all previous versions. In

addition, comparisons with earlier Ind-Ra’s transition and default studies should be viewed within

the context of the differing methodologies, whether rating movements were analysed across the

broad rating categories or at both the modifier and flat levels.

Transition Rates

To calculate transition rates, Ind-Ra examines the performance of ratings outstanding at the

beginning and end of a fiscal year. Withdrawn ratings are excluded from the transition table

calculations since they do not fit these criteria; namely, the ratings must be outstanding over a

full year or over the full period under observation. For the purpose of computation, Paid in Full -

PIF issues are treated as withdrawn ratings. Issuer ratings may reside in multiple cohorts, as

long as their ratings are outstanding at the beginning and end of the year, or multiple-year

horizons under observation. For example, the annual performance of an issuer rating initiated in

2009 and therefore outstanding at the beginning of 2010 and withdrawn in 2012 would be

included in the 2010 and 2011 cohorts. The rating’s performance over multiple-year horizons

would also be included in the two-year and three-year transition rates for each of the cohorts

noted, but excluded from four-year transition rates since the rating was withdrawn in year four,

and was not outstanding for four full years as part of any cohort. The occurrence and timing of

both rating upgrades and downgrades for corporate issuers can be attributed to changes in

qualitative and/or quantitative factors. Both measures are used to assess the business and

financial risks of corporate issuers. A qualitative analysis includes examining industry risk,

operating environment, market position, management, and accounting policies. In contrast, the

quantitative aspect of Ind-Ra’s corporate ratings focuses on a company’s policies in relation to

operating strategies, acquisitions and divestitures, leverage targets, dividend policy, and

financial goals. Key elements in determining an issuer’s overall financial health are profits and

cash flow, an important component in the analysis is the company’s ability to generate cash,

which is reflected in the ratios that measure profitability and coverage on a cash flow basis.

The rating transitions outlined in this study represent a distinct historical period, and may not

therefore represent future rating migration patterns. Transition rates are influenced by a number

of factors, including macroeconomic variables, credit conditions, and corporate strategy. It is

useful to examine the performance of Ind-Ra’s ratings on a relative scale within each rating

category. In addition, it is important to point out that while transition matrices are presented in

this study at the flat levels, some statistical analysis was conducted at the modifier level, unless

noted otherwise.

Default Rates

Ind-Ra’s default rates are calculated on an issuer/issue basis, rather than by Indian rupee

amount. First, defaults are examined by year for each static pool and individual rating category.

For example, if 25 issuers defaulted in 2012, and the 2012 static pool consisted of 2,000 issuer

ratings, the resulting annual default rate for all ratings in 2012 would be 1.3%. If 10 of these

defaults consisted of defaults among issuers rated at ‘BB’ at the beginning of the year, and

the ‘BB’ cohort at the beginning of the year totalled 500, the ‘BB’ 2012 default rate would be

2% (10/500).

From these annual default rates, Ind-Ra derives average annual default rates by weighting each

cohort’s default rates by the number of ratings outstanding at the beginning for the given cohort

relative to the number of total ratings outstanding for all cohorts. The 2012 ‘BB’ annual default

rate of 2%, calculated in the example above, might be followed by a 2013 ‘BB’ annual default

rate of 1%. A straight average of these two rates would ignore potential differences in the size of

the two cohorts. Instead, weighting the results based on the relative number of ‘BB’ ratings

outstanding in 2012 and 2013 gives greater emphasis to the results of the ‘BB’ cohort with the

most observations. The same technique is used to calculate average default rates over multiple-

year horizons. For example, the two-year default rate for the 2012 ‘BB’ rating pool would be

averaged with the two-year default rate for the 2013 ‘BB’ rating pool by weighting the default

rates by the relative size of each pool. The name of issuers/issues which defaulted in FY19 is

provided in Annexure III.

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

10

Annexure I

Figure 23 Ind-Ra’s Corporate Ratings Average Annual Transition Rates: FY09-FY19 (%) IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D Total

IND AAA 97.59 1.37 0.34 - - - 0.17 0.51 100.00

IND AA 1.46 95.43 2.43 0.39 - - - 0.29 100.00

IND A - 4.51 89.12 3.80 0.70 0.12 0.59 1.17 100.00

IND BBB - - 4.64 87.47 4.67 0.13 0.30 2.79 100.00

IND BB - - 0.10 3.77 90.11 1.66 0.16 4.19 100.00

IND B - - - 0.04 6.64 87.47 0.09 5.76 100.00

IND C - - - - - 6.35 63.49 30.16 100.00

Source: Ind-Ra

Figure 24 Ind-Ra’s Corporate Ratings Average Two-Year Transition Rates: FY09-FY19 (%) IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D Total

IND AAA 96.36 2.43 0.61 - - - 0.20 0.40 100.00

IND AA 3.05 90.73 5.12 0.49 0.12 0.12 - 0.37 100.00

IND A 0.08 8.77 79.44 6.58 1.28 0.15 0.53 3.17 100.00

IND BBB - 0.10 9.64 75.95 6.73 0.45 0.65 6.48 100.00

IND BB - - 0.22 8.06 80.12 2.73 0.35 8.53 100.00

IND B - - - 0.44 13.43 74.23 - 11.90 100.00

IND C - - - - 6.06 3.03 45.45 45.45 100.00

Source: Ind-Ra

Figure 25 Ind-Ra's Corporate Ratings Average Three-Year Transition Rates: FY09-FY19 (%) IND AAA IND AA IND A IND BBB IND BB IND B IND C IND D Total

IND AAA 94.98 3.83 0.72 - - - - 0.48 100.00

IND AA 4.54 86.08 7.72 0.91 0.30 0.15 - 0.30 100.00

IND A 0.30 12.04 72.02 7.22 1.71 0.20 0.60 5.92 100.00

IND BBB - 0.32 15.62 65.02 6.93 1.27 1.04 9.80 100.00

IND BB - - 0.25 13.77 67.95 3.85 0.49 13.69 100.00

IND B - - 0.14 1.37 21.23 57.40 - 19.86 100.00

IND C - - - 5.88 11.76 - 41.18 41.18 100.00

Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

11

Annexure II

Figure 26 Ind-Ra’s Structured Finance Ratings’ Average Annual Transition Rates: FY09-FY19 (%) IND AAA(SO) IND AA(SO) IND A(SO) IND BBB(SO) IND BB(SO) IND B(SO) IND C(SO) IND D Total

IND AAA(SO) 100.00 - - - - - - - 100.00

IND AA(SO) 2.35 97.25 - - - 0.39 - - 100.00

IND A(SO) 2.13 12.77 83.51 0.53 1.06 - - - 100.00

IND BBB(SO) 1.32 4.39 17.11 77.19 - - - - 100.00

IND BB(SO) - - - 23.08 76.92 - - - 100.00

IND B(SO) - - - - - 100.00 - - 100.00

IND C(SO) - - - - - - - 100.00 100.00

Source: Ind-Ra

Figure 27 Ind-Ra’s Structured Finance Ratings’ Average Three-Year Transition Rates: FY09-FY19 (%) IND AAA(SO) IND AA(SO) IND A(SO) IND BBB(SO) IND BB(SO) IND B(SO) IND C(SO) IND D Total

IND AAA(SO) 100.00 - - - - - - - 100.00

IND AA(SO) - 97.62 - - - 2.38 - - 100.00

IND A(SO) - 53.57 46.43 - - - - - 100.00

IND BBB(SO) 12.07 18.97 48.28 20.69 - - - - 100.00

IND BB(SO) - - - - - - - - 100.00

IND B(SO) - - - - - - - - 100.00

IND C(SO) - - - - - - - - 100.00

Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

12

Annexure III

Figure 28 Corporate Finance Defaults: FY19 Issuer Rating at Beginning of Year (FY19) Issuer Rating at Beginning of Year (FY19)

4 Genius Minds Private Limited IND BBB- Maharaja Agrofoods Private Limited IND BB+ A P Goyal Shimla University IND B+ Man Tubinox Limited IND B+ Abhinaash Agrofood Industries Private Limited IND B+ Matrix Bizcom Services Private Limited IND B+(INC) Abhiram Infra Projects Private Limited IND BB+ (INC) Meenakshi Energy Pvt. Limited IND BBB(INC) Accent Metals Private Limited IND BBB-(INC) Mirambika Agro Industries IND B+(INC) AG8 Ventures Limited IND BB- MMS Steel & Power Pvt. Limited IND BB Alpex Solar Private Limited IND BBB-(INC) My Car Private Limited IND B(INC) Anwesha Engineering & Projects Limited IND BB+ Nagabhushanam & Co IND BB-(INC) Arka Carbon Fuels Pvt. Limited IND BBB(INC) Narayanadri Hospitals and Research Institute Private Limited IND BB- Ayursundra Healthcare Private Limited IND BB- National Steel and Agro Industries Limited IND BBB- B D Motors Limited IND BB- Nemcare Hospitals Private Limited IND BB Bhaskar Tea & Industries Private Limited IND B-(INC) Octal Sales Private Limited IND B(INC) Caravel Logistics Private Limited IND B- Paradigm Tunneling Private Limited IND B Contec Syndicate Private Limited IND BB(INC) PEC Limited IND BBB- Delco Infrastructure Projects Limited IND BB Pink Rose Lingerie Pvt. Limited IND B+(INC) Delexcel Pharma Private Limited IND BB- Powerwind Limited IND BB-(INC) Dwarkadhis Projects Private Limited IND BBB- PSK Developers Pvt. Limited IND B+(INC) Emtelle India Limited IND B PVN Fabrics Private Limited IND BB(INC) Entally Astha IND BB-(INC) R R Holiday Homes Private Limited IND BB Firestar Diamond BVBA IND C Raipur Development Authority IND BBB Firestar Diamond FZE IND C Rajathadri Jewellers Private Limited IND B Firestar Diamond International Private Limited IND C Reliance Infrastructure Limited IND A- Firestar Diamond Limited, Hong Kong IND C RIDCOR Infra Projects Limited IND BBB- Firestar International Private Limited IND C RK Poultries Private Limited IND BB Fivebro International Private Limited IND C Sai Maatarini Tollways Limited IND BB(INC) Friends Paper Mills IND B+ Sanco Industries Limited IND BB-(INC) Goodwin Jewellers Private Limited IND BBB- Sant Muktai Sugar and Energy Limited IND B Govardanagiri Agro Industries Private Limited IND B+ Sara Spintex India Pvt. Limited IND B- GSCO Infrastructure Private Limited IND BB+ Saraf Trading Corporation Private Limited IND B(INC) GSN Ferro Alloys Private Limited IND B-(INC) Shiva Cotton Industries IND B+(INC) GVNS Tollway Private Limited IND BB(INC) Shivani Trendz Private Limited IND BB(INC) H M Industrial Private Limited IND BBB- Shivprasad Foods and Milk Products IND BB-(INC) IL&FS Education and Technology Services Limited IND A+ Shree Dwarkadhish Udyog Private Limited IND BB- IL&FS Environmental Infrastructure and Services Limited IND BBB Shri Ramalinga Textiles IND BB- IL&FS Financial Services Limited IND AAA Shri Shyam Warehousing and Power Private Limited IND BBB- IL&FS Transportation Networks Limited IND A SK Wheels Pvt. Limited IND BBB-(INC) Indo Sponge Power And Steel Limited IND B- Smart Motors Private Limited IND B(INC) Infrastructure Leasing & Financial Services Limited IND AAA Southern Auto Products IND B+(INC) International Commerce Limited IND BB+ Sree Gurudeva Charitable and Educational Trust IND BB-(INC) Ishan International IND B+(INC) Suchi Fasteners Private Limited IND BB- Isolux Corsan India Engineering & Construction Private Limited IND BB+(INC) Su-Kam Power Systems Limited IND BBB+(INC) Jai India Weaving Mills Private Limited IND BB+ Sure Safety Solutions Private Limited IND B

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

13

Figure 28 Corporate Finance Defaults: FY19

Issuer Rating at Beginning of Year (FY19) Issuer Rating at Beginning of Year (FY19)

Jalandhar Amritsar Tollways Limited IND B- Sushee Infra & Mining Limited IND BB+ JBF Petrochemicals Limited IND C Swastik Ceracon Limited IND BB-(INC) Jharkhand Road Projects Implementation Company Limited IND AA(SO) Swastik Coal Corporation Pvt. Limited IND BBB(INC) John Energy Limited IND A Telugu Cine Workers Cooperative Housing Society Limited IND B+ Jorbat Shillong Expressway Limited IND AAA (SO) The Academy of Engineering and Management Trust IND BB+ Joseph Leslie Dynamiks Manufacturing Private Limited IND B+ U R Agrofresh Private Limited IND B+ Jyoti Buildtech Private Limited IND BBB-(INC) Umadutt Industries Limited IND C(INC) Kamal Krishna Builders Private Limited IND BB- Uttarakhand Seeds & Tarai Development Corporation Limited IND A-(INC) Ketan Construction Limited IND BBB(INC) Velaven Polymers Private Limited IND B+ Krishna Stone Industries Private Limited IND BB-(INC) Vijay Textiles Limited IND B Lichchhwi Food India Pvt. Limited IND BB- Vikas Technoplast Pvt. Limited IND BB- LMJ International Limited IND BBB+ Vikrant Forge Private Limited IND BB-(INC) M V Omni Projects (India) Limited IND BBB+ Vinirrmaa Projects Pvt. Limited IND B(INC) M/s Kayval Krupa Petroleum IND BB- Vishal Infraglobal Private Limited IND BB- M/s Shantikalash Jewellers IND BB- Vishvas Power Engineering Services Private Limited IND BB M/s South Indian Constructions Private Limited IND BB Vista Pharmaceuticals Limited IND BB+ M/s. Shanthilal & Sons Jewellers IND BB- West Gujarat Expressway Limited IND AA-(SO)

Note: INC: Issuer Not Cooperating Source: Ind-Ra

Credit Policy Group

Ind-Ra’s FY19 Transition and Default Study September 19

14

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