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Credit Risk (Risk of Default)

Credit Risk = Interest Coverage Ratio


Interest Coverage Ratio = EBIT / Annual Interest Outgo
Higher the Ratio Better the Credit Rating of the company

Financial Leverage = Capitalization Ratio


Capitalization Ratio = Total Debt of the Company / Assets

Credit Spread: The Payoff for Assuming Credit Risk


The difference between the yield on a corporate bond and
a government bond is called the credit spread or yield spread

Predicting changes in a credit spread


depends on both the specific corporate issuer and overall bond
market conditions
Upgrade in a bond will narrow down credit spread
Falling interest rate will benefit the existing bond holder and vice
versa
A slowing Economy will result into higher credit or yield spread as
the chances of default will increase.
A growing Economy will have possibility of higher interest rates
and may result into high or low yiled spread on corporate bond
Debt Servicing
Interest coverage Ratio: the ratio of operating profit to interest
expenses, is used to determine how easily a company can service
interest payments on outstanding debt.
Interest coverage Ratio => 1 - means that the company will cover
its cost of debt for the year.
Highlights Corporate Debt-India
High Corporate Debt (March 2017).
Total Corporate Debt Rs 14.5 lakh crore Q2-16-17.
40% Corporate had debt with interest coverage ratio< 1 (During
q4 -16-17)
Power debt with interest cover < 1 at 70%.
Telecom debt with interest cover < 1 at 57%
Steel debt with interest cover < 1 at 55 %
17 % of the total bank loans are bad debts, the highest among
major economies
The Indian banking system has been saddled with bad loans,
which have risen to about 17 percent of the total loans, the
highest among major economies.
RBI has identified 12 stressed accounts for resolution under the
Insolvency and Bankruptcy Code
Profitability of Indian corporate has remained subdued with their
operating incomes falling 4 % sequentially.
The weaker companies with interest coverage<1 have seen their
operating incomes fall 35 % year-on-year

Power, Telecom, Steel Sectors Overleveraged


Lenders Are In Control Here
The debt was converted to equity, giving majority stake to the lenders

Resolution of non-performing assets will need higher provisioning


by banks (bad loans = Rs 7.7 lakh crore)
This trend of declining interest coverage ratio was observed across
companies of all sizes, according to the RBI data.

Public Debt-India
March 2016
The external debt to GDP ratio stood at 23.7 per cent at end-
March 2016
Indias external debt at end-March 2016 was placed at US$ 485.6
billion.
Commercial borrowings continued to be the largest component
of external debt with a share of 37.3 per cent, followed by NRI
deposits (26.1 per cent) and short-term trade credit (16.5 per
cent).
On residual maturity basis, short-term debt constituted about
42.6 per cent of total external debt at end-March 2016
US dollar denominated debt 57.1 %, Indian and Euro 2.5%.

Debt service payments increased to 8.8 per cent of current


receipts at end-March 2016
Other High Lights
India owed Rs 57,75,685 crores to internal and external lenders in
the financial year 2014-2015 - a whopping 46% of the countrys
gross domestic product.
77% of all long-term borrowings made by the government were
actually used to pay back interest and principal on earlier
borrowings rather than being spent on development expenditure
Populist schemes replete with corruption, Food, fuel and fertilizer
subsidies, wonky welfare programmes and spiralling defence
spending swallow 30% of India's budget. With interest eating up
25%, only about 40% of India's budget is available for everything
else, including health and education.
Broken system

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