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The Textile Magazine
jANUARY 2012
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17
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 Government’s 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 tex-
tile companies, most of which are heavily-geared.
The Textiles Ministry recently recommended a mor-
atorium extension by Indian banks on loans extended
to Indian textile companies after cotton textile manu-
facturers 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 bil-
lion, of which 75 per cent is the troubled cotton yarn
sector.
“Restructuring of loans will delay the deleveraging
of Indian textile companies as repayments are resched-
uled or deferred, keeping debt levels high,” says Tanu
Sharma, Associate Director in Fitch’s Corporates team.
“Leveraging continues to be impacted adversely by high
working capital debt and lower margins.”
Fitch notes that because of cash losses in the first half
of 2011-12 and the fact that funds are tied up in inven-
tories, the debt repayment capacity of some textile com-
panies 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.
“Given the uncertainty over global economic recovery
and, consequently, around overseas demand for textiles,
the risk is that cotton textile companies, hit by cash loss-
es or with large debt amid ongoing capex, would need
to undergo a financial restructuring,” says Ms. Sharma.
Should the extended moratorium be made available to
all textile companies, Fitch does not preclude the pos-
sibility that some companies which are not in immedi-
ate need of liquidity may also opt for the extension as
they had done during the 2008-2009 slowdown. Fitch
assesses restructurings 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 inven-
tories 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 ac-
quired 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 over-
seas demand could offset the impact of such recovery.
In YTD FY12 (end-March), Fitch has downgraded
two textile companies by one notch to ‘Fitch B+(ind)’,
revised the Outlooks of four companies to Negative
from Stable, downgraded six textile companies to ‘Fitch
D(ind)’ and assigned two companies ‘Fitch D(ind)’.
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 refi-
nancing risks in its ratings of Indian textile manufactur-
ers, with 80 per cent of the cotton textile entities rated
‘Fitch BB+(ind)’ and below.
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