SINGAPORE: As the rupee hits record lows against the US dollar, Indian companies, holding nearly US$100 billion in foreign-currency debt, are finding themselves dangerously exposed, and unhedged dollar debt could spell billions in losses for local borrowers.
India had around US$96.6 billion in external corporate borrowings outstanding at the end of last year, according to the Reserve Bank of India.
Nearly 77% of that, around US$74 billion, is denominated in US dollars. The sheer size of these borrowings, coupled with the slumping rupee, has triggered fears of a refinancing crunch. India's limited local markets leave companies with little alternative to borrowing abroad.
With local interest rates running high, borrowers have continued to rush to offshore markets in search of cheap capital.
But in order to pocket more savings, they often leave those positions unhedged. Fully hedging a one-year external commercial borrowing (ECB), for instance, costs an additional 6.5%, the Mumbai inter-bank forward offer rate).
And that's a price most companies are unwilling to pay. According to Naresh Takkar, managing director at local rating agency Icra, Indian companies hedge only 40%-60% of their foreign-currency borrowings.
Those unhedged positions mean Indian companies risk heavy mark-to-market losses if the rupee continues to slide, while some may even breach leverage covenants on overseas loans.
And there is little indication that the rupee will halt its plunge any time soon. The currency recently breached Rs56 against the dollar, down more than 16% from its 2012 high.
In a study late last year, Crisil Research found that the 42 top companies on the Nifty Index, excluding eight from the banking and financial services sector, had foreign-currency debt of Rs 1.3 trillion (US$23 billion), constituting nearly 25% of their total borrowings.
"We found out that when the rupee depreciated around 10% in July-September, these 42 companies reported a forex loss of Rs48bn on their books, which was nearly 8% of their profits before tax," said Crisil senior director Prasad Koparkar.
DEEP IMPACT
Companies in the infrastructure, oil, power and auto-related sectors have the most to lose, because they do not have a natural hedge.
"The impact (of unhedged positions) is deeper in sectors where the feedstock is imported and the domestic pricing of the finished product is not linked to the international price," said Icra's Takkar.
"The impact on capital-intensive sectors such as power, roads and telecoms with substantial forex borrowings is also higher, as revenues are in local currency."
Oil-marketing companies, which make purchases in US dollars but are paid in rupees, are acutely exposed to currency fluctuations. India's oil importers, for example, lose about Rs80bn annually for every rupee of depreciation. Mark-to-market losses need to be reported.
But India's ministry of company affairs has given borrowers a breather on the deadline, allowing them to stagger losses in their accounts over a period up to March 31 2020. This deadline was extended from March 31 2012, and relates to forex-related losses incurred since December 2006.
indiatimes.com
India had around US$96.6 billion in external corporate borrowings outstanding at the end of last year, according to the Reserve Bank of India.
Nearly 77% of that, around US$74 billion, is denominated in US dollars. The sheer size of these borrowings, coupled with the slumping rupee, has triggered fears of a refinancing crunch. India's limited local markets leave companies with little alternative to borrowing abroad.
With local interest rates running high, borrowers have continued to rush to offshore markets in search of cheap capital.
But in order to pocket more savings, they often leave those positions unhedged. Fully hedging a one-year external commercial borrowing (ECB), for instance, costs an additional 6.5%, the Mumbai inter-bank forward offer rate).
And that's a price most companies are unwilling to pay. According to Naresh Takkar, managing director at local rating agency Icra, Indian companies hedge only 40%-60% of their foreign-currency borrowings.
Those unhedged positions mean Indian companies risk heavy mark-to-market losses if the rupee continues to slide, while some may even breach leverage covenants on overseas loans.
And there is little indication that the rupee will halt its plunge any time soon. The currency recently breached Rs56 against the dollar, down more than 16% from its 2012 high.
In a study late last year, Crisil Research found that the 42 top companies on the Nifty Index, excluding eight from the banking and financial services sector, had foreign-currency debt of Rs 1.3 trillion (US$23 billion), constituting nearly 25% of their total borrowings.
"We found out that when the rupee depreciated around 10% in July-September, these 42 companies reported a forex loss of Rs48bn on their books, which was nearly 8% of their profits before tax," said Crisil senior director Prasad Koparkar.
DEEP IMPACT
Companies in the infrastructure, oil, power and auto-related sectors have the most to lose, because they do not have a natural hedge.
"The impact (of unhedged positions) is deeper in sectors where the feedstock is imported and the domestic pricing of the finished product is not linked to the international price," said Icra's Takkar.
"The impact on capital-intensive sectors such as power, roads and telecoms with substantial forex borrowings is also higher, as revenues are in local currency."
Oil-marketing companies, which make purchases in US dollars but are paid in rupees, are acutely exposed to currency fluctuations. India's oil importers, for example, lose about Rs80bn annually for every rupee of depreciation. Mark-to-market losses need to be reported.
But India's ministry of company affairs has given borrowers a breather on the deadline, allowing them to stagger losses in their accounts over a period up to March 31 2020. This deadline was extended from March 31 2012, and relates to forex-related losses incurred since December 2006.
indiatimes.com
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