Citi, DSP arms take a sub-prime knock
This is the first instance of the sub-prime crisis impacting local operations of global firms. Both these firms, globally, have been among the worst hit.
By TNN |
MUMBAI: The effect of the subprime on Wall Street firms is also now being felt on its Indian operations. Two companies belonging to DSP Merrill Lynch have been downgraded while the rating outlook on Citigroup���s non-banking finance companies has been lowered to negative from stable.
This is the first instance of the sub-prime crisis impacting local operations of global firms. Both these firms, globally, have been among the worst hit as a result of this crisis. Since the prices of the debt paper issued by the entities will fall following the move, mutual funds with exposure to such paper will show lower net asset values.
Crisil on Wednesday said it was re-examining its ratings on 27 institutions in the Indian financial sector, whose ratings are linked with the global ratings of their parent companies. Of this, it has completed its re-examination of 16 of these institutions.
Other major firms, which are still to be rated, include GE Capital Services, GE Money Financial Services and GE Money Housing Finance. The long-term ratings on DSP Merrill Lynch and DSP Merrill Lynch Capital have been downgraded to ���AA+��� from ���AAA���, and the outlook for these ratings has been revised to negative from stable.
It has also revised outlooks on long-term ratings of four Citigroup companies (Citicorp Capital Markets, Citicorp Finance India, Citicorp Maruti Finance, and CitiFinancial Consumer Finance India) to negative from stable. The move would affect the financing costs of both these firms.
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According to ICICI Prudential Mutual Fund CIO Nilesh Shah, ���The downgrade of Merrill Lynch and the negative implication on Citi will certainly have an adverse impact on their borrowing prospects in India. Until now, both of them were borrowing on a AAA-rating, and now customers will demand higher prices. There is, however, a comfort factor in their strong local balance sheets. Even if Citi and Merrill Lynch are not heavy borrowers, they borrow regularly. While we are not worried about the credit side, spreads will certainly widen because of the higher cost.���According to Crisil, these rating and outlook changes are driven by its reassessment of levels, at which the parent companies��� global ratings map to the agency���s rating scale.
���The mapping factors in the credit profile of parent companies (reflected in their global credit ratings and outlooks), the stability of their credit ratings and Crisil���s assessment of the outlook for the financial sector as well as the economic scenario in the US and European markets, where the parent companies have large exposures,��� the agency said.
According to a Citi spokesperson, ���Each one of our NBFCs remain well capitalised and we continue to review capital infusion requirements into our various legal vehicles as required by business needs. Citi has recently infused $250 million into the bank branch as a result of such a review in preparation for Basel-II requirements and to support organic growth.���
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S&P has placed the Citigroup Rating on CreditWatch with negative implications. Internationally, Fitch Ratings has downgraded Citigroup���s long-term issuer default rating (IDR) to ���AA-��� from ���AA���. It has also downgraded Citi���s individual rating to ���B��� from ���A/B���, while affirming the short-term IDR at ���F1+���. The rating outlook is negative. For the first quarter of 2008, Citigroup has announced a loss of $5.1 billion. Crisil has also said any change in the S&P rating could impact the mapping and the agency���s long-term ratings on the four Citigroup companies. In 2007, Merrill Lynch incurred a net loss from continuing operations of $8.6 billion, with write-downs of around $25 billion.
The agency has also said ratings also factored a high degree of commitment from the parent companies to support their Indian operations, should the need arise. It said this support remained strong despite the challenging global financial sector environment.
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