Indebted companies rush to lock in funds on Modi hopes

Several private Indian firms want to pay off debts by raising up to $5

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billion this year through share sales, emboldened by a surge in the stock market and an anticipated economic recovery after Narendra Modi was elected as prime minister.

Leading the equity issuances in the private sector are highly leveraged firms such as GVK Power & Infrastructure Ltd, Adani Enterprises Ltd and others in capital intensive industries such as infrastructure, metals and telecommunications, bankers say.

These companies borrowed heavily in the past few years, when India's economy was one of the fastest growing in the world, but were squeezed by the slowdown in growth last year and the slide in the rupee to record lows.

In most cases, banks stopped giving fresh loans to these indebted companies, whose loans often exceeds their equity several times over, leaving them with few options but to tap the equity market to raise money to reduce their debt.

"There will be a stampede of Indian companies going to the markets and trying to reduce leverage to take advantage of this some kind of Modinomics," said Eric Mookherjee, a Paris-based fund manager at Shanti India, which manages Indian stocks.

"The access to capital is much easier now, and you need to clean up your balance sheet before you get into the investment mode again. So, the engine has now been started."

Bankers say 2014 is poised to become the best year for equity offerings in India since 2010, which saw some $24 billion raised by state-run and private companies.

In 2014, state-run firms are expected to raise up to $6 billion via share sales, which, in addition to the $5.4 billion already raised in the first-half of the year and the anticipated issuances by the private sector, would bring the total amount to around $16 billion for the year, according to investment bankers' estimates and Thomson Reuters data.

The rush to raise capital could gather speed if the budget on July 10 paves the way for a revival of the economy after the longest spell of growth below 5 percent in a quarter of a century, bankers say.

FINDING FUNDING

Business-friendly Modi was elected by a resounding majority in May and since then, the benchmark stock market index has risen nearly 9 percent to touch record highs, lifted by his pledges to boost growth and create jobs.

Some bankers, however, cautioned that "Modinomics" may not provide an instant revival, meaning indebted firms, whose fortunes are linked to the domestic economy, may see a delay in the pick-up in earnings growth.

"Everybody is getting very euphoric but not sure if all these expectations would be met in the near future," said a senior investment banker at a large U.S. bank who declined to be named as he was not authorised to speak to the media.

For now, companies are pressing ahead with raising funds. In a sign of the times, Jaiprakash Associates Ltd and GMR Infrastructure Ltd, two of the most indebted mid-sized Indian companies, on Thursday raised $250 million each by selling shares. The companies will use the funds to repay some debt, bankers involved in the deals said.

Jaiprakash has a total debt of $10 billion, giving it a debt to equity ratio of 5.9 times compared to an industry average of 0.69, while GMR with debt of $6.5 billion has a debt to equity ratio of 5.1 times, according to Thomson Reuters data.

The share offerings by the two companies came a week after mobile phone operator Reliance Communications Ltd raised $800 million in what was India's biggest share sale since the Modi government assumed office in May.

A sluggish economy and stalled bureaucratic decision-making for the past two years thwarted capital investment and dented earnings, making it tough for the companies to raise funds.

At the end of 2013, some 37 percent of Indian corporate debt was owed by companies whose earnings were not enough to cover interest payments, up from 34 percent in July-September, according to Credit Suisse.

The rupee's weakening also substantially increased the rupee-value of outstanding dollar debt and the amount of rupees needed to fulfil interest payments - factors that weighed on the balance sheet of several companies.

Since the Modi government took office, however, the outlook for the economy and corporate earnings growth has improved.

The average revenue of 24 companies in the infrastructure sub-index, which includes highly indebted firms including Reliance Communications and Jaiprakash, should rise 10.3 percent in this fiscal year to March from 8 percent last year, according to Thomson Reuters data.

"The worst is over. The companies' operating performance has bottomed out," said Deep Mukherjee, senior director, corporate ratings, at India Ratings & Research, a Fitch unit.

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