In a clear indication of the impact of the economic slowdown on corporate credit

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quality, rating agency Icra said the total number of rating downgrades, as a percentage of outstanding ratings rose sharply from 4.4 per cent in the second half of 2010 to 10.3 per cent in the second half of 2011.

“Deterioration in cash flows, demand slowdown, inventory losses/increase in raw material cost and delays in debt servicing have been the key reasons for the rating downgrades in Q4, FY11. Also, most issuers downgraded because of delays in debt servicing were already in the non-investment grade at the time of downgrade,” said a report from the affiliate of global rating agency Moody’s Investors Service.

Over the same period, the total number of rating upgrades declined from 7.1 per cent in H2, 2010 to 4.4 per cent in H2, 2011, said Icra.

According to Icra, sectors that have witnessed large downgrades and had a high inverse credit ratio (downgrades to upgrades ratio) in H2 2011 were hotels (inverse credit ratio of 15 times), and power (12.5). Apart from these, textiles, metals and mining, sugar, food and food products, and engineering reported higher inverse credit ratios (2.6 to 5.6) than the average for the overall rating changes (2.34) during H2, 2011.

An analysis of the rating actions during the last four halves indicates that the inverse credit ratio rose to 1.36 in H1, 2011 and further to 2.34 in H2, 2011.