Amtek Auto may be the biggest corporate bond default in years
If Amtek Auto defaults, it may be the biggest corporate bond default in years, as its acquisition spree squeezed its cash flows.  The auto component maker has missed payments on the Rs 800 crore ($148.15m) worth of bonds that matured yesterday, which could expose the Indian banking system to Rs 8,000 crore ($1.48bn) of loans, which may have to be classifed as bad loans if Amtek does not make the payments quickly.  There are over 80 investors, including Axis Bank, that own the bonds of Amtek, and nearly 32 banks have exposure, including IDBI Bank and ICICI Bank.  If the auto company fails to pay by its due date, banks will have to classify not just their exposure of bonds, but also their loans as sub-standard or non-performing and set aside 15% as provisions.  This has also exposed the limitations of ratings companies in warning debt investors against a potential default.  

KOLKATA: The Amtek Auto saga yet again exposes the limitations of rating companies in warning debt investors against a possible default. CARE Ratings which suspended the rating last month is seen by many as bolting after the horse has fled. Bhushan Steel and Jaiprakash Industries too had enjoyed high ratings before plunging to default."There is an inherent conflict of interest in the very process of rating. It is related to the fact that rating companies are paid by the organization that they rate. This came to the limelight during the global financial crisis in 2008 and G-20 had proposed some solutions which are yet to be implemented," said Partha Ray, professor of Economics at IIM Calcutta."The second problem is that rating companies do not want to accelerate the inherent crisis of any corporation," Ray said. The decision to differentiate between a solvency problem and a liquidity problem has always been a tricky one. While they may like to avoid any contagion, their failure time and again to flag off liquidity crisis in any company raises doubts over a possible corporate governance failure.CARE Ratings suspended its investment grade 'AA-' rating assigned to Amtek on August 7. "The ratings have been suspended as the company has not furnished the information for monitoring of the rating,” it had said in a release. Brickwork Ratings followed by lowering the company’s rating to 'C' from 'A+'.The auto component maker may turn out to be one of the biggest corporate bond defaulters in years with the banking system having an exposure of nearly Rs 7,900 crore. The company has missed payments on the Rs 800 crore worth of bonds that matured on Monday."So should we say blame it all on -- or on all -- rating agencies? That would be unfair," said Raman Uberoi Crisil Ratings ’ business head for large corporate ratings."For investors, credit ratings have reduced distortion, or information asymmetry, in the capital market by flagging credit risk using alpha-numeric symbols. And constant scrutiny of financials by raters over the years has meant that today, independent, granular data are available for more than 30,000 companies," Uberoi said.Amtek Auto reported a net loss of Rs.157.60 crore in the June quarter and net sales was at Rs 854.22 crore.