Rupee Plunge Prompts JSW to Scrap Dollar Loans: Corporate India

JSW Steel Ltd. scrapped a plan to raise dollar loans to refinance part of its 280 billion rupees ($4.7 billion) of borrowings after yields denominated in the U.S. currency surged and the rupee fell to a record.

India’s third-largest steelmaker, which has gross rupee debt of about 170 billion rupees, will borrow in local currency, Group Chief Financial Officer Seshagiri Rao said. The company plans to cut the interest rate it pays on the loans to an average 9.7 percent from 10.5 percent, he said. Mumbai-based JSW planned to swap about 55 billion rupees of loans at JSW Ispat Steel Ltd. with dollar debt after absorbing the unit, Rao had said on April 12. Ispat was merged with JSW last month.

“Yields have gone up in the international markets and we can’t pursue the option of refinancing in dollars,” Rao said in an interview in Mumbai. “We wanted to do it to maintain the ratio of foreign to domestic loans at 50 percent, as was the case before the Ispat merger.”

JSW abandoned plans to raise dollar debt after speculation the U.S. Federal Reserve may pare stimulus measures led to a flight of funds out of riskier emerging market assets. The rupee plunged after Fed Chairman Ben S. Bernanke on May 22 first signaled a potential reduction in the monetary authority’s monthly bond purchases. The rupee’s drop has made it Asia’s worst-performing currency in the past three months.

The yield on benchmark U.S. Treasuries has risen 89 basis points since May 1 to 2.57 percent. The rate touched 2.61 percent on June 25, the highest since August 2011, according to data compiled by Bloomberg.

Shares Drop

JSW shares rose 0.8 percent to 616.35 rupees at close in Mumbai. The stock has fallen 24 percent this year, compared with a 31 percent drop in the S&P BSE Metal Index and a 0.4 percent increase in the benchmark S&P BSE Sensex.

JSW, 14.9 percent owned by Japan’s second-biggest steelmaker JFE Holdings Inc., will borrow from non-banking finance companies as banks aren’t allowed to lend below their base rate, Rao said. The minimum rate of lending at State Bank of India, the nation’s largest bank is 9.7 percent, the lowest among all state-run banks in the country.

The company is seeking shareholders’ approval to raise its borrowing limit to 400 billion rupees from 250 billion rupees to fund its expansion plans and finance any acquisition, JSW Steel said in its annual report.

Rising volatility of the rupee has also affected JSW’s plan to borrow in foreign currency because of increased hedging costs. The price to insurance against fluctuations is making dollar debt more expensive than rupee borrowings, R.K. Garg, finance director at New Delhi-based Petronet LNG Ltd., India’s biggest natural gas importer, said on June 21.

Hedging Policy

The recent depreciation of the rupee is a result of hedging by companies and increased speculation that the currency will fall, Rao said. While JSW, whose sales are denominated in dollars, hasn’t changed its hedging policy, any volatility adversely impacts the company, he said.

“A lot of companies were not hedging earlier but the way rupee has depreciated most companies are now looking forward to hedge,” Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets Ltd. said over phone. “ With hedging costs there is no arbitrage left in raising dollar debt.”

The currency, which fell to an unprecedented 60.7650 on June 26, weakened 0.2 percent to 60.2400 per dollar in Mumbai today, according to local bank prices compiled by Bloomberg. The rupee’s one-month implied volatility has surged 452 basis points last quarter, the most since September 2011, indicating greater risks of exchange-rate swings.

Earnings Volatility

“Such a sharp fall will hit companies in the form of translation or foreign-exchange losses,” Rao said. “This will bring volatility in earnings of all corporates with foreign exchange liabilities even though operationally they may be doing well.”

JSW Steel, which agreed in December 2010 to buy Ispat Industries for 21.6 billion rupees, will absorb the company, Chairman Sajjan Jindal said on Sept. 1. The ratio of foreign currency debt fell to 39 percent from 50 percent after the merger, Rao said.

In November, JSW Ispat won the environment ministry’s approval for projects worth 65 billion rupees that will boost steel capacity by 2 million metric tons and help build a 4 million-ton pellet plant and a 300-megawatt power unit.

Mining Ban

Production at JSW, which expanded its biggest factory in southern state of Karnataka to 10 million tons annually from 6.8 million tons in 2011, fell after a court-ordered ban in July of the same year on iron ore mining in the state, as it probed environmental breaches. Capacity use had fallen as low as 30 percent, Jindal had said in September, 2011. The Supreme Court allowed mining to restart in the province in a Sept. 3 order last year.

Improved iron ore availability from October this year as more mines start in Karnataka will help in raising volumes for JSW Steel, which may gain at 10 percent each year until March 2016, Jimesh Sanghvi, an analyst at Avendus Securities Pvt. Ltd., said in a report on June 25. The focus on increasing output of high-value products and improving efficiency will help in raising per ton earnings before interest, taxes, depreciation, and amortization, according to the report.

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