Question

From the e-Activity, evaluate at least two companies’ financial statements that have received a negative rating from one of the financial rating agencies. Determine which financial ratios most likely impacted the rating decision. Compare and contrast at least two financial ratios that support the rating agency's claims. Speculate on how the ratios are likely to change considering the economic environment in which it operates. Support your position.

This came from e-activity. There is no particular company listed in the e-activity

Use the Internet to research at least two financial rating agencies that publish financial research and analysis on stocks and bonds, such as Standard and Poor's, Mood’s, and Fitch. Be prepared to discuss.

Answer 1

One such company is VodafoneZiggo Group whose outlook on VodafoneZiggo Group BV's ('VZ', or 'the company') has been changed to negative from stable due to following weakness in its financial statements :

1. Leverage (Gross Debt- EBITDA ratio) exceeds comfortable industry norms : The comapny's has maintained a high leverage of over 6.0x as per Moody's adjusted leverage which is alarming given the industry in which it operates.

2. Stress on Adjusted free cash flows : Vodafone stricts to its practice of distributing high dividends despite heavy leverage and debt stress. Also, adjusted CFO/ Debt ratio for VZ is weak at around 9.8% for the LTM period ended 30 June 2018. Negative FCF from cash flows is a worrying indicator impacting the rating decision. Adjusted CFO/ Debt ratio for VZ is weak at around 9.8% for the LTM period ended 30 June 2018 and it is not expected to improve materially in next 12 months given the competition in the industry.

Another such company is Yes Bank Ltd whose foreign currency issuer rating downgraded to Ba1 from Baa3. rating by Moody & changed its outlook to negative. The rating action due to the following two reasons :

1. Fear of maintaining Capital Adequacy ratio in future due to change in senior management : In Moody's opinion, although the bank's reported credit fundamentals remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative because they complicate management's effective implementation of the bank's long-term strategy. Furthermore, these developments could constrain the bank's ability to raise new capital. This arose due to RBI's directive to restrict tenure of MD Rana Kapoor and resignation by other key directors from board.

2. Low current and savings account deposit ratio which is a key long term indicator of funding profile at cheaper rates ; Despite these developments, the bank's funding and liquidity positions have remained fairly stable. Nevertheless, its funding profile is relatively weaker compared to other public sector banks in India, as measured by its low current and savings account deposit ratio and the dominance of corporate deposits.

3. Divergence in Yes banks asset credit quality compared with RBI's assessment of asset quality in last two years.