Mumbai: India’s attempt to buoy the rupee by creating a cash crunch has driven corporate debt costs to a 2009 high, threatening the creditworthiness of businesses already battling the worst economic slowdown in a decade.
The extra yield on three-year company bonds over government notes surged 113 basis points in July to 211, data compiled by Bloomberg show, as the central bank raised two interest rates and curbed lenders’ access to cash. The similar spread in China is 133 basis points. The local unit of Fitch Ratings cut the credit outlook for Steel Authority of India Ltd (SAIL), the nation’s second largest producer of the alloy, this month to negative from stable.
Rating cuts will outnumber upgrades as the Reserve Bank of India’s (RBI’s) unexpected policy reversal boosts funding costs and delays an economic recovery, according to Crisil Ltd, the local arm of Standard and Poor’s. Local companies’ credit quality has declined to a five-year low after their total liabilities rose almost threefold since 2007-2008 and interest expenses rose 226%, Fitch’s Indian unit said this month.
“RBI steps to tighten liquidity, against the backdrop of sharp rupee volatility, will delay an economic recovery and add to corporate India’s challenges,” Mukesh Agarwal, president of research in Mumbai at Crisil, said in an interview on Monday. “Higher than expected rates and slow growth will weaken credit quality and lead to more non-performing assets at banks.”
RBI governor D. Subbarao increased the bank rate and the marginal standing facility rate to 10.25% from 8.25% on 15 July, while keeping the benchmark repurchase rate unchanged at 7.25%. Last week, the central bank capped its funding support to lenders and raised their daily cash reserve requirements. Subbarao will hold borrowing costs at a review on Tuesday, according to 31 of 32 economists surveyed by Bloomberg. One expects a 25 basis points reduction.
This month’s tightening steps reversed the policy bias the central bank favoured in the first half, when cooling inflation allowed Subbarao to lower rates by 75 basis points, or 0.75 percentage point. Asia’s third largest economy expanded 5% in the year ended 31 March, the least in a decade, government data show. ArcelorMittal and Posco scrapped $12 billion of proposed steel projects in India this month amid a demand slowdown.
Company bond sales plunged 96% in July, according to data compiled by Bloomberg, as the surge in yields prompted businesses to avoid the debt market.
The RBI measures have led to some hardening of rates, but whether the higher rates will sustain, only time will tell, C.S. Verma, chairman of state-owned SAIL, said by telephone from Hyderabad. “We are not desperate to go to the market and will wait for an appropriate time. Changes in ratings or the outlook are reflective of sovereign ratings. I don’t see any significant difficulties because of this.”
The funds crunch engineered by the central bank has pushed short-term corporate debt costs above 11%, threatening to aggravate the economic slowdown. Three-month commercial-paper yields surged 283 basis points this month to a 16-month high of 11.25% on 26 July, data compiled by Bloomberg show.
Cash at Indian companies may fall short of repayment obligations by one-third in the year through March 2014, according to Crisil. Local businesses face Rs.1.1 trillion in debt maturities this fiscal year, according to the credit assessor. Rising payment defaults will boost bad loans at Indian banks to about 4% of total advances by 31 March from 3.3% 12 months earlier, Crisil predicts.
S&P downgraded Ballarpur Industries Ltd, India’s biggest paper maker, this month, citing its rising debt and declining cash, and said it has a negative outlook on the firm.
The benchmark five-year AAA corporate bond yield in India has climbed 76 basis points since RBI’s rate increases to 9.68%, according to data compiled by Bloomberg, while the rate on 10-year sovereign notes rose 57 basis points to 8.13%. The rupee lost 8.7% since 31 March in Asia’s worst performance, touching a record low of 61.2125 per dollar on 8 July. It fell 0.6% to 59.42 on Monday.
“Yields aren’t going to be stable anytime soon, whether sovereign or corporate, because of monetary-policy uncertainty, debt-servicing concerns and rising bad loans,” Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Co. in Mumbai, said in a phone interview on Monday. In this uncertain environment, investors are avoiding corporate debt exposure.
Bond risk for Indian companies is rising. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers has climbed 56 basis points from this year’s low in May to 275, according to data provider CMA.
Given mounting economic stress, the credit metrics of corporates are unlikely to show a significant improvement this fiscal year, analysts at India Ratings led by Mumbai-based Deep N. Mukherjee wrote in a 17 July report. The current economic situation provides limited elbow room to RBI to cut interest rates and for the government of India to embark on large-scale policy stimulus.