MUMBAI, April 6: Crisil, Icra, CARE and Duff & Phelps. The Indian rating agencies are in a tizzy following the merger-and-acquisition (M&A) explosion which has rocked the Indian financial markets with their rating calculations threatened by overnight balance-sheet transformations.With no clue on whether borrowed funds may be splurged on asset acquisitions or whether management profiles will overnight be drastically changed, the agencies are groping for answers that creditors and bond investors desperately want.
"Frankly, we are shocked," was how CARE managing director PM Thomas summarised the issue for The Financial Express.
The recent spate of mergers and acquisitions has rudely burst in the agencies' faces, leaving them nonplussed on the risk factors of the transactions which radically change the risk-profiles of borrower companies.
"Corporate mergers have come as a shock factor for rating agencies since we are not in a position to get to know such crucial information in advance," CARE managingdirector PM Thomas told The Financial Express.
"All we can do under the circumstances is to keep our eyes and ears open and review the ratings in case our clients are involved in such an exercise," he added.
The takeover bids that have taken the corporate world by storm affect the rating process primarily on two counts. First, if the offer price for a takeover bid is significantly higher than the book value of the target company's stock, the bidder's debt repayment abilities might suffer. Second, a takeover of a sick company may upset the predator's cash flows, thus affecting its risk profile.
However, since at least during the long drawn out M&A process, rendered longer-drawn in India recently by legal wrangles, not enough data is available to the rating agencies, rendering them helpless while the process drags on. The uncertainty of conclusion, that is, the question mark on whether the manouever would go through finally, does not allow reviews to be undertaken immediately.
The Indian financialmarkets have been rocked by a spate of mergers and acquisitions of late and not all of them have been friendly or negotiated.
In certain cases, such as the Sterlite effort to take over Indian Aluminium, it is belived that large borrowings of unsecured nature are being used (although this has not yet been confirmed by the company). The Raasi Cements promoters, under challenge from the India Cements management, are believed to have been pledging property and other assets in order to raise money for defence of their stake in the company.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
