Companies leveraged at 2008 levels

Written by Shobhana Subramanian | Updated: Dec 29 2011, 08:51am hrs
With the rupee having lost close to 18% this year, Indian companies with dollar liabilities are in a spot. Although their fundamentals may not have deteriorated too much, the cost of borrowing overseas has risen sharply in the last six months given the problems in the eurozone.

V Anantharaman, managing director, co-head, wholesale banking, South Asia for Standard Chartered, believes that funds will continue to remain expensive for some time.

Anantharaman, who also oversees the M&A space, tells Shobhana Subramanian that while there may not be too many multi-billion deals in the near future, companies are tapping PE funds through both equity and mezzanine deals.

There seems to be a fair degree of concern on foreign currency repayments coming up

In terms of maturing ECBs and FCCBs, people have borrowed for a variety of reasons, including projects, acquisitions and general corporate purposes. In some cases, the repayments have been predicated on cash flows. In other words, these are amortising loans, and companies would have already been paying them off. We dont really hear of any defaults, though its possible some loans may have been restructured. The issue that remains is of the larger bullet loans where repayments are coming up; in most of these cases they will need to be refinanced. Given that many of the FCCBs may not be converted into equity, RBI has opened a window where companies can start the process of refinancing six months prior to maturity. But this is a somewhat short time-

frame so companies are initiating discussions much earlier and I feel this is going to be a significant part of the activity in 2012.

How tough is it going to be for companies to refinance loans

From a credit environment point of view, the bulk of corporate India has reasonably good fundamentals; even if they have slowed down a bit, there are no real downgrades. There are some problems for some specific sectors, as pointed out by RBI. So, from a credit perspective, there should be no major issues. The question is, who do they get the loans from The bank market has changed quite dramatically since the time they went in for these loans. In the syndicated loan market, you dont have underwritten syndications as you had three or four years ago. What you have is a best effort basis; fewer banks are willing to hard-underwrite deals and then get other banks. Thats because the European banks today have an issue with providing dollars, while the American banks are flush with dollars but they have their constraints in terms of risk-weighted assets and in terms of capital and arent able to expand their credit base.

Would the Indian banks be able to refinance some of this debt

Indian banks are big players in the foreign currency loan market, but the challenge for them is that their liabilities are also maturing. They raise money either from the bond markets or they have bilateral loans or loans from the syndicated market. Syndicated loans are costing them more. On average, the cost has gone up a minimum of 150-200 basis points. For them to raise financing in the bond markets should not be an issue, there is enough credit appetite but the costs have gone up sharply. Right now, Indian banks are making sure they borrow at the right costs.

How do you see the scenario unfolding I think a couple of things may happen ...

In terms of the way we have managed our borrowings and the net outflows for the country, we have had caps in place for costs. So today, even if companies have access from a credit perspective, theyre not able to close out loans because of the caps. So RBI may consider whether the pricing caps make sense given the liquidity environment. If they relax it a bit, a lot more of foreign currency borrowings may get done. Overall, unfortunately, borrowers have to reconcile to higher costs and I dont see costs coming down in a hurry.

An indication is CDS (credit-default swaps) spreads, which have doubled between June this year and now.

Given that the rupee has depreciated sharply, what does it mean for corporate balance sheets

If you crystallise the loan in rupees, there is an automatic hit to the profit and loss or writing down of reserves. In any case, this is a potentially big issue for corporate India for March 31, 2012, since there are a fair number of companies that have left their positions unhedged. How does this compare with the post-Lehman crisis Things will take longer to settle down this time around. At that time, there was a liquidity crisis that was corrected by central banks injecting liquidity into the system. This time, the issues are more linked to sovereigns as opposed to just the banking system.

People also preferred dollar loans even for rupee expenses, after RBI allowed some flexibility in ECB norms, because even on a fully-hedged basis, there was an arbitrage opportunity. But now the arbitrage is gone. For an AAA corporate, a five-year fully-hedged loan would cost closer to 11-12%. While that may still be cheaper than a rupee loan, since companies are unclear on where the currency is headed they dont know whether to take a risk. Moreover, the forward premiums have been extremely volatile.

Are Indian companies less leveraged today than they were in 2008

From an acquisition perspective, its true that in the last couple of years not too many companies have borrowed to do buyouts. And many have also deferred their capex. At an aggregate level, if you look at leverage in terms of net debt to trailing 12 months ebitda, I would think we are more or less at the same level as in 2008, with companies in some sectors fairly highly leveraged. Also, going ahead, its going to be difficult for companies in certain sectors to access the banking system since there could be some amount of restructuring of loans.

Are those companies that have some cash at all looking at overseas acquisitions given distress values, especially in Europe

A lot of Indian companies have learnt that while it may be easy to pick up distressed assets, its not always easy to turn them around in a reasonable period of time. The question now is whether to focus on growing organically or on sorting out issues relating to acquisitions, especially because theres some amount of retrenchment involved and also there are cultural issues. So we dont see too many companies in a hurry to buy companies abroad, except in the resources space. But Indian companies will make investments in certain markets like Africa and Asia but these will not be multi-billion dollar deals. Where there could be M&A opportunities is if companies and conglomerates feel they have expanded to a level where they want to restructure, hive off, demerge, or sell some business.

Typically, Indian promoters dont like to sell at low valuations, and they have the ability to hang in there ...

That attitude is changing. People are getting in private equity (PE) investors when its needed and they want to deleverage; companies arent always waiting for a better valuation. Also, we feel there are going to be more mezzanine deals, structured deals with a fixed return, or optionally convertible debt. There are several dedicated mezzanine funds coming up. Also, the market will see limited windows next year for equity deals since it will be difficult to do QIPs. I expect more preferential allotments to PEs, However, if you notice, the US equity markets have been fairly active as has the China market.