What Causes a Credit Rating Downgrade?

Downgrades typically result from a material deterioration in one or more of the core risk pillars — business risk, financial risk, governance, or liquidity — relative to what the existing rating assumed.

Financial Triggers

•      Sustained increase in leverage beyond levels the rating assumed

•      Declining interest coverage or DSCR

•      Deteriorating liquidity, including reduced headroom under bank limits

•      Weakening cash flow generation relative to reported profit

Business and Governance Triggers

•      Loss of a major customer or contract

•      Adverse regulatory or industry developments

•      Governance concerns, including large or opaque related-party transactions

•      Delays or cost overruns in a major ongoing project

Why the Combination Matters

Downgrades often result from more than one factor moving unfavourably at the same time — for example, a lost customer combined with an already-stretched working capital position — rather than a single isolated event, which is why agencies examine the interaction between risk factors rather than each in isolation.

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Disclaimer: This article is intended for general informational and educational purposes only and does not constitute financial, credit, investment, or legal advice. Credit ratings are assigned solely by SEBI-registered Credit Rating Agencies (such as CRISIL, ICRA, CARE Ratings, India Ratings, Brickwork, Acuite, and Infomerics) based on their own methodologies, policies, and the information available to them at the time of assessment. FinMen Advisors provides preparatory and advisory support to companies undergoing a rating exercise and does not issue, influence, or guarantee any rating outcome. Readers should exercise independent judgement and consult qualified professionals before making business or financial decisions.