Billionaire Costs Climb as $18 Billion of Debt Due: India Credit

Default risk for Indian companies has risen to a one-year high as a plunging rupee increases the cost of repaying $18 billion of debt due by March.

Companies led by billionaires Mukesh Ambani and Anil Agarwal are among borrowers with $10.6 billion of bonds and loans maturing by Dec. 31 and $7.4 billion in the following three months, data compiled by Bloomberg show. The average cost of insuring notes of seven Indian issuers against non-payment has risen 96 basis points in 2013 to 366 basis points as of Aug. 22, the highest since September, according to data provider CMA. A similar measure for Asia fell 49 basis points to 96.

Credit Suisse Group AG predicts the fiscal period ending March 31 could be “the year of reckoning” as the slowest growth in a decade impairs profitability and debt-servicing ability. SJS Markets Ltd. says the rupee’s slide to a record will raise refinancing costs and lead to accounting losses. The amount due in the coming seven months is similar to the $20.1 billion in debt raised overseas by Indian companies this year.

“Companies are more vulnerable to currency shocks than at any time in recent history,” Deep Narayan Mukherjee, a Mumbai-based director at India Ratings Ltd., the local unit of Fitch Ratings Ltd., said in an Aug. 20 telephone interview. “The debt-servicing capability of Indian companies is at the lowest level in at least five years.”

‘Misguided’ Claims

Borrowings of 10 Indian business groups tracked by Credit Suisse surged sixfold to 6.31 trillion rupees ($97 billion) in the six years ended March 2013, according to an Aug. 13 research report by the Swiss bank. These include companies such as billionaire Anil Ambani’s Reliance Communications Ltd., Shashikant and Ravikant Ruia’s Essar Power Ltd., Gautam Adani’s Adani Power Ltd. and Agarwal’s Vedanta Resources Plc.

The conclusions reached by Credit Suisse are “highly speculative and misguided” and the brokerage didn’t provide details on the debt, a spokesperson for Reliance Anil Dhirubhai Ambani Group said by e-mail on Aug. 21. “There is also no question” of facing any stress in meeting debt obligations as the group’s projects are progressing toward scheduled completion, the spokesperson wrote.

“Such snapshots are an unfair measure of the health of industrial groups, given they show just the costs of investments, not the future income from these investments,” V. Ashok, Essar group chief financial officer, said in an Aug. 22 e-mail, referring to the Credit Suisse report. The group companies are refinancing “high-cost” rupee loans with dollar debt and overseas income provides a natural hedge, he said.

Currency Hedge

The Adani group had gross debt of 693 billion rupees as of March 31, lower than the Credit Suisse estimate of 811 billion rupees due to the sale of an Australian coal terminal, an Adani spokesperson said in an Aug. 22 e-mail. The company has purchased currency hedges for short-term liabilities and project finance is of long-term nature, the spokesperson said.

Manish Kalhatgi, spokesman for GMR Infrastructure Ltd., declined to comment in an e-mail, while press officers at groups controlling Vedanta, Essar Power, Adani Power, Jaiprakash Associates Ltd. and GVK Power & Infrastructure Ltd. didn’t respond to e-mails seeking comment on the Credit Suisse report.

“For most of them the debt increase has outpaced capital expenditure, and asset sales are yet to take off,” Ashish Gupta, Kush Shah and Prashant Kumar, Mumbai-based analysts at Credit Suisse wrote in the report.

Dollar Yield

The yield on Vedanta’s $1.2 billion of 6 percent notes due 2019 rose to 8.72 percent yesterday from 6.58 percent on July 31, Bloomberg-compiled prices show. The yield on its $500 million of notes due in January rose to 6.68 percent from 3.89 percent in the same period, the data show.

The average yield for dollar debt of Indian companies rose 133 basis points, or 1.33 percentage point, to 6.32, according to HSBC Holdings Plc indexes.

Applications to restructure stressed loans climbed to 3.38 trillion rupees as of June 30 from 2.27 trillion rupees a year earlier, according to data from the Corporate Debt Restructuring Cell, a forum for Indian banks to negotiate such debt. Bad loans in the banking system reached 3.9 percent of total lending as of the end of June, the highest in at least five years, data compiled by the central bank show.

‘Already Alarming’

“The level of restructured debt is already alarming and will rise as corporates get more stressed,” Supratim Sarkar, Mumbai-based head of structured finance at SBI Capital Markets Ltd., said in an Aug. 19 telephone interview.

The investment banking arm of India’s largest lender restructured 550 billion rupees of debt in the year ended March 31, an almost 17-fold increase from 33 billion rupees two years earlier, according to Sarkar. SBI Capital is currently helping companies including Lanco Infratech Ltd., Educomp Solutions Ltd. and Bombay Rayon Fashions Ltd. recast loans, he said.

Shantanu Prakash, Educomp’s managing director, declined to immediately comment when called on his mobile phone. E-mails to Bombay Rayon’s spokeswoman Prachi Deshpande and Lanco Infratech spokesman A. Narasimhan were unanswered.

Well-run companies that generate large proportions of their earnings overseas will be able to tide over current difficulties and are used to coping with rupee volatility, according to HSBC Global Asset Management. Reliance Industries, whose exports comprised 63 percent of sales in the quarter ended June 30, had 930.7 billion rupees of cash and equivalents at the end of the period compared with total debt of 803.1 billion rupees.

Reliance Industries’ spokesman Tushar Pania didn’t respond to an e-mail seeking comment.

‘Fantastically Well-Run’

“There are some fantastically well-run companies in India with a lot of their business outside of India,” Bill Maldonado, Hong Kong-based chief investment officer for Asia Pacific at HSBC Global, which manages $413 billion, said in an Aug. 21 interview. “Many of those are very cheap and profitable.”

India’s rupee has weakened 14.7 percent this year, the most in Asia. The currency rose 0.3 percent to 64.4500 per dollar today after dropping to a record 65.56 yesterday. The yield on the 10-year benchmark bond has risen 24 basis points in 2013 to 8.29 percent as the central bank engineered a cash crunch to shore up the rupee.

India Ratings said on Aug. 1 it may downgrade 65 of 290 investment-grade local issuers should the rupee remain weaker than 60 per dollar for “a sustained period.” Only half of local firms’ foreign-exchange exposure, which included $200 billion of outstanding overseas liabilities as of March 31, is hedged, Crisil Ltd., the local unit of Standard & Poor’s, said in a July 10 report.

“Indian companies will able to refinance their debt at a higher spread,” Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets, said in an e-mail interview yesterday. “They will have to book the exchange-rate differential through their profit-and-loss account, which will negatively impact profitability.”

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