Curbs on ECB to repay rupee debt haunt firms

Tags: News

25 companies at risk, may turn CDR cases: Ind-Ra

The Reserve Bank of India’s (RBI) ban on external commercial borrowings (ECB) to refinance rupee loans may aggravate refinancing challenges of several companies from the power, infrastructure, roads and ports sectors. Bankers say this can even lead to a spate of fresh corporate debt restructuring cases.

The silver lining, if any, could be a quick revival in the economy, as risks will wane with any improvement in sentiments.

“Companies seeking to refinance domestic loans through ECBs will not be able to do so any more. Either promoters will have to infuse fresh liquidity or take fresh loans from Indian banks. If cash flows deteriorate, banks may not refinance the debt fully, in which case some debt could become non-performing asset (NPA),” said a bank official.

RBI on April 22 ordered domestic lenders to restrict their foreign branches from extending guarantees to offshore joint ventures/sub-sidiaries of Indian firms for availing foreign currency loans to repay rupee credit.

The central bank had observed that banks were extending non-fund-based credit facilities such as guarantees/stand-by letters of credit on behalf of foreign joint ventures and subsidiaries of Indian companies for purposes not connected to their businesses.

“RBI wants banks to reduce exposure to highly leveraged companies. Some companies having stressed assets but good business models and with a component of dollar earnings were trying to dollarise their earnings through balance sheet with credit support from domestic banks,” said the head of a foreign bank engaged in corporate and investment banking. He preferred anonymity.

Rajeev Agarwal, managing director of Essar Ports, said the decision would restrict businesses from reducing their cost of debt. “Interest rates are so high that capital-intensive industries will be hard-pressed to reduce their debt first and then their cost of borrowings, which are already high.”

Interest rates for corporate loans in the domestic market rule around 12-15 per cent, whereas overseas loans are available at 3.35-5 per cent, which carry a three per cent margin on the six-month Libor (London Interbank Offered Rate) of 0.35 per cent.

“If companies are competing internationally, it makes sense to avail the benefits available abroad. India is always looking for more resources in terms of cash flow and ECB was always going to supplement resource creation,” Agarwal said.

He clarified that the restriction was only on repayment of rupee loans and not on raising ECBs for expansion and working capital requirements. Essar Ports has a debt of Rs 5,700 crore, which it plans to pay through internal accruals and profits from operational projects.

Deep N Mukherjee, senior director, corporates, at India Ratings, said, “One may conjecture the macro drivers, if any at all, behind the timing of the RBI announcement, but this definitely sends companies with refinancing risk back to the drawing board to re-evaluate their options.”

In a report released on Wednesday, India Ratings estimated that at least 25 companies would find it challenging to efficiently refinance their debt if their forex earnings do not improve significantly. These firms have a cumulative refinancing requirement of Rs 53,200 crore and total bank debt of Rs 2,34,400 crore.

Of these, 21 companies are in the high refinancing risk group while 12 with total debt exposure of Rs 1,59,500 crore and refinancing requirement of Rs 30,500 crore may be hit real hard by the RBI order, India Ratings said.

It said these 12 companies have insignificant export earnings and limited foreign operations. Additionally, 13 of the 21 companies with a loan burden of Rs 74,900 crore and refinancing requirement of Rs 22,700 crore may not be able to access low-cost ECBs.

Mercator, which has a debt of around Rs 3,000 crore, said the RBI decision would hurt companies that were looking at ECB to repay rupee loans. “We are not affected majorly as the shipping industry is not allowed to raise ECB for payment of rupee loan. We can still raise ECB for general working capital requirement, which is good for the group as a whole,” said Atul Agarwal, managing director of Mercator.

Suren Jain, MD of Jaiprakash Power Ventures, said the company never sought ECB for repayment of rupee loans, hence remained unaffected. “We have been paying our loans either through internal accruals or through disinvestment of our projects in power, real estate and cement segments,” Jain said. Jaiprakash group has a total debt of over Rs 60,000 crore on the books.

Gross bad loans of 40 listed Indian banks rose to Rs 2,43,000 crore as of December 2013, a 37 per cent jump from last year. Industry estimates show loans worth Rs 5-6 lakh crore have gone for corporate debt restructuring.

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