Double Whammy for Corporates as Record Debt Payments Looming: India Credit By Anurag Joshi - Dec 20, 2011

Indian companies have a record $11.4 billion of dollar-denominated bonds to repay in 2012 just as the rupee falls to an all-time low and borrowing costs in the U.S. currency exceed all but one of Asia’s markets.

Companies have more than double the debt coming due next year compared with a five-year average of $5.6 billion, while ICICI Bank Ltd. (ICICIBC) and Bank of Baroda have the most maturing debt, according to data compiled by Bloomberg. Yields on Indian company dollar-denominated bonds have increased for five straight quarters and currently sit at 6.85 percent, the second- highest level among 11 Asian countries tracked by HSBC Holdings Plc.

The rupee’s 15.5 percent drop against the dollar this year to the weakest level in data compiled by Bloomberg going back to 1973 makes paying back dollar debt more expensive for Indian companies earning income in rupees. Lower profits will damp economic growth that Prime Minister Manmohan Singh said will increase 7.5 percent in the fiscal year ending March 31.

“There is a dual impact on widening of refinancing costs and the depreciating rupee,” Ananda Bhoumik, a Mumbai-based vice president at Fitch Ratings said in a phone interview on Dec. 16. “Dollar spreads have widened overseas, so refinancing debt through borrowing abroad is also costlier.”

The extra yield investors demand to hold dollar-denominated bonds sold by Indian companies rather than U.S. Treasuries rose 290 basis points, or 2.9 percentage points, this year to 615.2 basis points yesterday, according to indexes compiled by HSBC. Borrowers are paying a premium that’s more than double the 262 basis-point spread for debt of U.S. corporates, according to Bank of American Merrill Lynch indexes.
No Access

Yields on India’s corporate bonds may be pushed higher by a decline in benchmark Treasury bonds, with yields on 10-year Treasury notes expected to rise 88 basis points to 2.7 percent by the end of 2012, according to 70 analysts surveyed by Bloomberg.

“Our liquid funds and repayments from the asset side would be the primary source of funding for meeting the bond repayment obligations and we do not expect to access the markets for refinancing,” ICICI Bank said in an e-mailed reply to questions yesterday. Bank of Baroda Chairman M.D.Mallya declined to comment yesterday.

Indian companies sold $9.2 billion of non-rupee bonds this year, compared with $8.7 billion last year, according to data (BOB) compiled by Bloomberg.

“The rupee’s fall is beyond any speculation and now issuers have to ensure they repay bondholders,” M.V. Tanksale, chairman of Central Bank of India, said in an interview yesterday. “Their refinancing options are few because domestic liquidity is tight and there is a debt crisis in Europe.”
Europe’s Debt Crisis

Relative yields on company bonds from the U.S. to Europe and Asia have expanded 102 basis points to 271 this year as the European sovereign debt crisis intensified, threatening global growth and corporate earnings. That’s the biggest annual increase since a 329 basis-point jump in 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.

“Issuers would resort to an approach that doesn’t disrupt their business processes and that won’t hamper investor confidence,” Arun Kaul, chairman of Kolkata-based Uco Bank said in a phone interview yesterday. “They will have to bear a cost for this which has risen in an unprecedented way in the form of a sharp depreciation in the rupee.”

Refinancing overseas debt in the next 12 months may be challenging for Indian companies “if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending,” Moody’s Investors Service said in the Dec. 14 report.
Rising Yields

Lenders borrowed 1.7 trillion rupees ($32 billion) from the Reserve Bank of India overnight on Dec. 19, the most this year, indicating a shortage of cash in the banking system. They borrowed 1.6 trillion rupees yesterday, according to central bank data.

ICICI Bank, India’s largest private lender, has the equivalent of $3.7 billion of principal payments on bonds and loans due in 2012, data compiled by Bloomberg show. Bank of Baroda, a Vadodara, north-east India-based lender, has $216 million of interest payments due, the data show.

The rupee was little changed at 52.89 per dollar in Mumbai yesterday, according to data compiled by Bloomberg.

Yields on 10-year government bonds have gained 40 basis points this year as the central bank raised the benchmark repurchase rate by 375 basis points since March 2010 to curb inflation. Reserve Bank of India Governor Duvvuri Subbarao left the rate unchanged at a three-year high of 8.5 percent on Dec. 16, halting the fastest round of increases on record.

Yields on the 8.79 percent bonds due November 2021 fell five basis points to 8.28 percent in Mumbai yesterday, according to the central bank’s trading system.
Default Swaps

The cost of insuring the debt of State Bank of India against non-payment was little changed at 395 basis points on Dec. 19, up from 161 at the end of last year, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. State Bank is regarded as a proxy for the nation, which doesn’t have dollar debt.

Credit-default swaps insuring the sovereign debt of the biggest emerging-market nations have also increased. Contracts on Brazil have risen 53 basis points to 164 this year, while those on China have more than doubled to 150, according to CMA. Russia’s are up 129 to 276. 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.
Rupee ‘Surprise’

Sales of rupee-denominated bonds plunged 15 percent to 1.7 trillion rupees this year as companies sought cheaper methods of fundraising, data compiled by Bloomberg show.

The cost of borrowing in rupee bond markets is 250 basis points higher than average yields for dollar debt, with five- year AAA rated corporate debt yielding 9.35 percent, according to data compiled by Bloomberg.

“The rupee’s fall will come as a surprise for many companies,” Parthasarathi Mukherjee, Mumbai-based president of treasury and international banking at Axis Bank Ltd., the biggest rupee-denominated bond arranger this year, said in a phone interview on Dec. 19. “Some companies will be under pressure and defaults can’t be entirely ruled out.”

To contact the reporter on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net
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