Firms expedite asset sales to pay loans

This financial year, a large number of stressed Indian companies are likely to face liquidity issues while servicing debt, following the Reserve Bank of India (RBI)'s notification to restrict re-financing of loans from April 22. A staggering Rs 1.9-2.1 lakh crore of bank loans are due for refinancing within a year and companies will have no option other than expediting asset sales to repay loans, say bankers.

Many of these over-leveraged companies such as Jaypee, GMR and Suzlon have already started selling assets to cut debt. Bankers say two years ago, when banks had appealed to promoters to start selling assets, their expectations were very high. With a deteriorating macro-economy and RBI insisting banks address the stress quickly, promoters have moderated expectations. But by now, buyers, too, have become choosy due to the huge risks involved.

Companies have already announced plans to sell assets worth Rs 60,200 crore, or 11.6 per cent of their debt. But despite these asset sales, the leverage of Indian companies is likely to remain high, according to a study by India Ratings. Last Tuesday, RBI had announced new restrictions on credit facilities banks could extend to foreign entities of local companies. The restrictions prevent banks from extending loans or guarantees to be used to roll over borrowers' existing rupee loans.

Currently, both fund- and non-fund-based credit facilities for Indian companies, used to repay existing rupee loans, keep corporate borrowers' credit risks restricted to the bank. Moody's says when domestic companies aren't able to service loans, some of these facilities appear to be extended. Therefore, what is essentially a problem loan isn't reflected as one by banks, owing to financial engineering.

India Ratings says it has classified Indian companies into five groups, based on the relative ease of refinancing and market access as one of the parameters. However, this could become a challenge for some companies, given RBI's recent notification.

"The companies that will bear the brunt are those classified under the categories 'elevated risk to refinance' and 'medium ease to refinance'," says Deep Mukherjee of India Ratings. Of the 21 companies in the 'elevated risk' group, 12, with debt exposure of Rs 1,59,500 crore and a refinancing requirement of Rs 30,500 crore, will be particularly impacted by the RBI notification. These companies have insignificant export earnings and limited foreign operations. A total of 13 of the 21 companies in the 'medium ease to refinance' category have debt exposure of Rs 74,900 crore and a refinancing requirement of Rs 22,700 crore; now, these might not be able to access low-cost foreign loans. Many stressed companies are already taking steps to reduce debt.

An estimated 25 companies, with a cumulative refinancing requirement of Rs 53,200 and overall bank debt of Rs 2,34,400 crore, might find it increasingly challenging to refinance their debt if their foreign exchange earnings do not improve significantly. "This will lead to many Indian companies selling assets and seeking corporate debt restructuring," says a banking analyst. While the cautious approach of bankers is intuitive, the banking system might be faced with the challenge that if prompt refinancing decisions aren't taken, some high-value loans will turn distressed.

Underwriting, too, might pose a challenge, as some of these companies have a low asset cover. Given their low interest coverage, higher interest (possibly reflective of their risk) hits their debt-servicing ability further.