Till debt do us part

Lukewarm equity markets, tight credit may enhance concerns on highly leveraged firms.

Bankers and companies haven’t been crying foul over RBI’s rate rises for nothing. While balance sheets of most Indian companies have improved much after the financial crisis of 2008-09, the indebtedness of select Indian companies, particularly in the infrastructure and real estate space, remains high. Though some have raised equity capital to repay debt and slowed capital expenditure plans, the problem persists. For instance, in the case of BGR Energy, Dish TV, Adani Power and GMR Infra, the increase in the net debt-to-equity ratio has been substantial, say analysts.

Typically, equity markets come to the rescue of highly leveraged companies when their books are stretched. This was visible even after the Lehman crisis, when a spate of companies raised money through qualified institutional placements (QIPs). Some of the cash-strapped companies raised capital through this route. However, with lacklustre market conditions, combined with poor performance of the past QIPs, this option is also closed for highly leveraged companies. Poor market conditions combined with an environment of tight credit availability and rising interest rates, concern about potential delinquencies, debt restructuring and strains on balance sheets become tremendously important, say analysts.
 

FY10-11

Interest as
% of OPDebt equity
ratio* HDIL7.280.47 BGR Energy Sys10.831.4 Unitech14.210.71 NCC37.451.78 Dish TV44.8321.7 Punj Lloyd55.39NA IVRCL55.81.58 Hind Construct66.786.18 GMR Infra118.15NA Suzlon Energy133.67NA *Total Debt/Networth                                             Consolidated figures
Data source: Capitaline                       Compiled by BS Research Bureau

Close to a dozen companies have interest coverage ratios (Ebitda/interest payable) of less than 4x in FY12, says a note by BNP Paribas. The profitability of these companies is expected to come under pressure if they fail to roll over debt at reasonable interest rates or raise equity, the report adds. Despite issues of leverage, some of these companies have seen some buying due to their ‘cheap’ valuations, but all is clearly not well.

To make matters worse, for some companies, the actual debt may be higher than what appears, thanks to the pressure of foreign currency convertible bonds (FCCBs). Close to $7 billion was raised in 2006-07 and are due for redemption in FY12 and FY13. Conversion seems highly unlikely as most of them are under water, except Tata Motors and L&T, which means companies will need to look at raising capital through debt. Stock prices of most companies which had issued FCCBs are trading below the conversion price. As a result, they could have to repay the principal at maturity value by issuing equity and/or borrowing at higher interest rates. The RBI estimates FCCBs worth $7 billion are due for redemption in the next two years.