Fitch Ratings says cash losses in the Indian cotton textile sector are impairing the debt servicing capacity of manufacturers, making debt restructuring imminent. The agency also notes that while the Governments debt restructuring proposal for the textile sector will provide temporary relief from liquidity pressures, it will not stem deterioration in the capital structure of cotton textile companies, most of which are heavily-geared.
The Textiles Ministry recently recommended a moratorium extension by Indian banks on loans extended to Indian textile companies after cotton textile manufacturers reported operating losses for the first half of 2011-12. The operating losses were most pronounced in cotton yarn manufacturing and lower-end fabric due to exceptional volatility in cotton prices, making them more prone to severe liquidity risks. Exposure of Indian banks to the textile sector is estimated at INR 600 billion, of which 75 per cent is the troubled cotton yarn sector.
ìRestructuring of loans will delay the deleveraging of Indian textile companies as repayments are rescheduled or deferred, keeping debt levels high,î says Tanu Sharma, Associate Director in Fitch’s Corporates team. ìLeveraging continues to be impacted adversely by high working capital debt and lower margins.î
Fitch notes that because of cash losses in the first half of 2011-12 and the fact that funds are tied up in inventories, the debt repayment capacity of some textile companies has deteriorated, leading to over-utilisation of working capital limits. In some cases, companies have defaulted due to an inability to obtain timely increase of working capital facilities, as banks tightened lending criteria for the sector.
ìGiven the uncertainty over global economic recovery and, consequently, around overseas demand for textiles, the risk is that cotton textile companies, hit by cash losses or with large debt amid ongoing capex, would need to undergo a financial restructuring,î says Ms. Sharma.
Should the extended moratorium be made available to all textile companies, Fitch does not preclude the possibility that some companies which are not in immediate need of liquidity may also opt for the extension as they had done during the 2008-2009 slowdown. Fitch assesses restructuring in line with its distressed debt exchange criteria which entails making an assessment as to whether or not a restructuring should be treated as distressed and taking appropriate rating actions.
Demand for cotton and cotton products was weak between May and November 2011 as increased inventories and liquidity pressures caused textile mills to postpone buying of cotton and yarn. EBITDA margins of cotton yarn manufacturers fell in the first half of the year as companies sold off the high-cost inventories acquired earlier at the cost of lower margins and booked losses on forward contracts for cotton purchase. Margin recovery is expected for most textile companies in the fourth quarter of the year on the back of falling cotton prices although potentially weaker-than-expected overseas demand could offset the impact of such recovery.
In YTD FY12 (end-March), Fitch has downgraded two textile companies by one notch to ëFitch B+(ind)í, revised the Outlooks of four companies to Negative from Stable, downgraded six textile companies to ëFitch D(ind)í and assigned two companies ëFitch D(ind)í.
Fitch has outstanding ratings on 54 textile companies, (excluding those in the non-monitored category), out of which two-thirds are cotton textile companies, and one-third are in synthetic or blended textiles. It has largely factored in the impact of cotton price volatility and refinancing risks in its ratings of Indian textile manufacturers, with 80 per cent of the cotton textile entities rated ëFitch BB+(ind)í and below.