Indian corporations have increasingly been funding overseas and a sliding rupee will likely cause significant losses as unhedged US dollar debt comes due for refinancing.
The Indian rupee has been depreciating against the dollar for the past three months and the trend shows few signs of reversing. Because of this, Indian corporations that have not hedged their foreign currency debt will struggle as it comes due for refinancing.
The rupee has fallen from 48.6 to the dollar on February 5 to a high of 56.1 to the dollar on May 24, though it has since recovered slightly to 55.6 to the dollar at the time of going to press.
This long-term slide will have a significant impact on the costs of refinancing for Indian corporates, particularly as they have been increasing their exposure to the dollar over the past few years.
“Indian issuers have increasingly been looking for more offshore funding sources to tap, as a needed diversification away from their domestic INR sources. The USD market is the first stop,” said Clifford Lee, head of fixed income at DBS.
Leif Eskesen, chief economist for Indian and ASEAN at HSBC agrees: “Indian corporates have increasingly tapped external sources of funding over the last couple of years.”
According to statistics from the Reserve Bank of India, international outstanding corporate debt stood at US$96.6 billion at the end of last year, US$74 billion of which is denominated in US dollars, and many of these corporations did not take the precaution of hedging, as the Mumbai interbank forward offer rate costs around an additional 6.5%.
When this falls due for refinancing, corporations are likely to run into difficulty, according to Naresh Takkar, managing director of Indian ratings agency ICRA, an associate of Moody’s.
“This will certainly push up the cost of funding because the last year and a half or so the trend has been to raise a significant amount of foreign funding because rupee rates have been high. This provided an arbitrage opportunity, but because there has been significant volatility, hedging costs have gone up,” he said in an interview with Asiamoney PLUS on May 28.
The majority of the pressure will be on foreign currency convertible bonds (FCCBs) in June, when over US$1.1 billion of bonds will mature, according to Fitch Ratings.
“A significant number of FCCBs are maturing in the short term so the direct impact would be on those,” said Takkar.
“Refinancing is going to be pretty significant, some weak entities could potentially default and those entities that have raised foreign bonds in the past are certainly at a higher risk,” he added.
Many of these corporations did not take the precaution of hedging as until recently the risk of severe currency depreciation was not considered likely. Takkar estimated that companies typically only hedge around 40%-50% of their foreign currency liabilities. Because of this, they will have to repay significantly more, in real terms, than they borrowed.
As well as the additional costs that will be induced as a result of the depreciating rupee, international interest in Indian debt is waning.
“There is certainly less international interest in Indian debt because of the global uncertainty so foreign inflows have been impacted,” said Takkar. However, while there will be a squeeze, he does not foresee defaults on a large scale.
“Overall there is tightness on the credit quality, we are not expecting large scale defaults to happen. I think refinancing will happen but it will have to be done on a higher cost basis,” he said.
Equally, a Moody’s report released on May 28 states that although the rupee depreciation is insignificant for sovereign credit, the currency slide will have a credit negative effect on corporations with foreign currency repayments due.
“Indian firms that have large foreign currency repayments that are due this year will clearly suffer from depreciation,” wrote Atsi Sheth, Vice President and Senior Analyst for Moody’s Sovereign Risk Group.
“Depreciation is a credit negative development for Indian firms without export revenues and with foreign currency obligations.”
Depreciation welcomed by sovereign
A number of factors, including the low impact of the depreciation on sovereign debt, and the country’s large current account deficit, mean that the government is unlikely to take any drastic measures to prevent the currency from sliding further, at least in the short term.
“My sense is that seeing as the country is running an extremely high currency deficit then policy makers are not totally against the rupee deprecating. Given that as the background I think the policy response has not been very aggressive,” said Samiran Chakraborty, head of Standard Chartered’s India research team.
According to the Moody’s report, government foreign currency debt comprises only 7% of total government debt.
“Most of it is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. Therefore, the direct effect of depreciation on the government’s own debt repayment capacity is limited,” said Sheth.
Indeed depreciation of the rupee could even benefit the sovereign standing, by correcting the import-export imbalance, encouraging exports to the country. However, the benefits may be capped by the current global slowdown.
Because of the lack of desire from Indian policymakers to implement any major changes to halt the rupee’s depreciation, Indian corporations may simply have to shoulder their losses.