Indian companies face rising costs to refinance record redemptions of U.S. dollar-denominated debt as yields on their securities surge and the rupee declines to an all-time low.
Bank of Baroda and Bank of India lead more than 39 companies with $10.6 billion of debt due this year, more than double last year’s total, data compiled by Bloomberg show. While benchmark 10-year Treasury yields fell to record lows and U.S. corporate notes pay 3.49 percent, according to Bank of America Merrill Lynch indexes, costs for Indian borrowers are surging. Yields on dollar-denominated bonds rose 42 basis points to 6.03 percent in May, according to HSBC Holdings Plc indexes.
Indian companies are being hit by a double whammy as the rupee’s 6.4 percent tumble last month raises their costs in dollars to pay off maturing debt. At the same time, the government is urging companies to boost spending on infrastructure needed to support the growth of Asia’s third-largest economy, which has slowed to a nine-year low.
“The rupee’s drop has been unprecedented, and therefore there’s an unprecedented increase in costs for us to refinance,” Rajiv Kumar Bakshi, executive director at Bank of Baroda, said in a telephone interview from Mumbai on June 4. “The high cost structure will have a bearing on performance and there is little issuers can do in the present global and domestic macroeconomic conditions.”
The rupee posted the worst performance last month of the 11 most-traded currencies in Asia, as foreign funds pulled $262 million from the nation’s stocks in April and May, according to data from the stock market regulator compiled by Bloomberg.
“Risk aversion globally and inflationary pressures at home have had the biggest bearing on the rupee, and companies are suffering,” said Jani Kurppa, a fund manager in Helsinki at EQ Asset Management Ltd., which manages $4.7 billion in debt. “These pressures will persist and corporates will have to pay more for funds.”
Standard & Poor’s said on April 25 that India needs to cut its current-account and budget deficits for investors to regain confidence. The rupee dropped to a record low of 56.515 against the dollar on May 31 amid concern Europe’s debt crisis will slow growth in the South Asian economy.
The extra yield investors seek to hold Indian company dollar-denominated bonds widened to 548 basis points, or 5.48 percentage points, yesterday, from 488 at the start of May, HSBC indexes show. The spread on comparable U.S. notes increased 30 basis points to 233 in the same period, according to Bank of America Merrill Lynch indexes.
Bank of India
Of the borrowers with debt due this year, Bank of Baroda has $1.36 billion maturing, and Bank of India has $1.18 billion to refinance, the data show. State Bank of India has $1.09 billion due, Tata Motors Ltd. $473 million, and Suzlon Energy Ltd. $389 million, according to the data.
“There is a significant impact of the rupee’s fall, not just not on performance but also on sentiment,” N. Seshadri, executive director of Bank of India, said in telephone interview from Mumbai June 4. “The increase in costs is going to compel lenders to re-visit overseas operations.”
Gross domestic product expanded 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the government said May 31.
Thirty percent of companies in India’s benchmark stock index posted March-quarter profits below analyst estimates, due to the highest borrowing costs among the biggest economies in Asia. Analysts cut their earnings forecasts for the year to March 2013 by 14 percent since April 2011 to 1,281 rupees per share, the most since the 2009 financial crisis, according to 1,600 estimates compiled by Bloomberg.
Elsewhere in the markets, yields on 10-year government bonds have dropped 28 basis points since May 1 after the Reserve Bank of India in April lowered the benchmark interest rate to 8 percent. The yield on the 8.79 percent note due November 2021 rose two basis points to 8.39 percent as of 10:06 a.m. in Mumbai, according to the central bank’s trading system.
The cost of protecting State Bank of India debt against non-payment fell 1.4 basis points yesterday, and has risen 67 basis points in the past month, to 387.9 percentage points, according to data provider CMA. State Bank is regarded as a proxy for the nation in the credit-default swap market.
Default swaps insuring the sovereign debt of the biggest emerging-market nations also advanced. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Contracts on Brazil rose 46 basis points to 168.5 in the past month, while those on China jumped 36 basis points to 140.3, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Russia’s are up 91 to 281.1.
Rising Indian corporate dollar financing costs come as rupee-denominated bond yields increased, limiting options for borrowers. The extra yield investors seek for top-rated five-year rupee debt compared with similar-maturity government notes advanced 17 basis points in May, the biggest gain in at least a year, according to data compiled by Bloomberg.
“The availability of funds domestically or overseas is going to be a constraint for Indian companies,” EQ Asset’s Kurppa said. He declined to comment on his investments.
Indian companies issued the equivalent of $2.5 billion of international bonds this year, compared with $7.85 billion in the same period of 2011, data compiled by Bloomberg show.
The last borrower to sell dollar-denominated bonds was Axis Bank Ltd., which raised $500 million in March. Yields on the 5 1/8 percent of September 2017 notes rose 15 basis points to 5.23 percent yesterday, from 5.08 percent at the start of May, according to Royal Bank of Scotland Group Plc prices.
Indian Railway Finance Corp Ltd. plans to sell as much as $300 million of bonds overseas by July 25 should dollar rates be favorable, Managing Director Rajiv Datt said in a phone interview on June 5.
“The premium for funds has increased because the outlook on fundamentals has weakened in the last few weeks,” said Ganti N. Murthy, head of fixed income at Peerless Mutual Fund, which oversees the equivalent of $900 million. “Corporates are going to suffer the most and so will the economy.”