Last updated: November 29, 2011 5:37 pm

Indian groups risk default on dollar debt

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Indian rupee notes

Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.

Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated.

The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a lucrative stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full.

Many Indian companies resorted to the FCCBs as a convenient way to raise cheap debt when the country’s stock markets were gripped by exuberance between 2005 and 2008, with the main Sensex index peaking in November last year at more than 21,000 points.

However, since then it has plunged 20 per cent, which will mean buyers are expected to demand repayments rather than conversion into shares. The plunging value of the rupee against the dollar – down 17 per cent since its 2011 high in late July – is set to make this hugely costly for the companies involved.

Jagannadham Thunuguntla, strategist at SMC Global Securities, a New Delhi broker, said companies that had made cheap foreign loans and had failed to hedge their dollar exposure were sitting on a “time bomb”.

Reliance Communications, Suzlon Energy and Tata Motors are among those that analysts said had significant amounts of such dollar-denominated debt maturing over the next 12 months.

Indian rupee graphic

RCom’s shares have fallen nearly 50 per cent since the beginning of the year, while Suzlon’s have dropped 57 per cent and Tata Motors has fallen 30 per cent.

All have said there is no risk of default but they did not specify how they would deal with the rising cost of their debt. It is unclear to what level they have hedged their exposure to the dollar.

However, analysts fear that some companies that had banked on their share prices continuing to climb might be unable to afford to repay their convertible bonds when they come due.

A report by Edelweiss, a Mumbai-based financial services group, said that 60 per cent of FCCBs outstanding had been raised at a time when the Indian rupee was trading at 42 or less against the dollar in May 2008.

However, the currency has been the worst performer in Asia currency this year and on Tuesday was trading at about Rs52 against the dollar, after touching an all-time low at 52.73 on November 22.

RCom, the mobile telecoms operator controlled by Indian billionaire Anil Ambani, said it plans to redeem FCCBs worth $1.1bn due in March 2012.

Tata Motors, India’s largest automotive group by revenues, said it was not planning to restructure its FCCBs, worth $490m, but said it was concerned about the foreign currency debt exposure. The group reported a 16 per cent fall in net profit for the second quarter ending September 30 compared to the same period a year ago, partly due to foreign exchange losses.

Meanwhile, Suzlon, the world’s third-largest manufacturer of wind turbine generators, said that, in spite of its shares trading at about Rs25 – much lower than the conversion prices band of Rs76-Rs97 it offered investors – it was confident it would be able to manage its FCCBs repayments worth $500m due in two tranches next year.

The original text has been updated to reflect the fact that Tata Motors’ share price has fallen 30 per cent in the year to date, rather than 86 per cent as previously stated.

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