In an article I had written last August for a newspaper, I had said the stock market was due for an adjustment and that Indian companies should stay liquid and batten down their hatches. There would be plenty of deals at a cheaper price.
Until a few months ago, Indian newspapers were full of quotes from international bankers about how Indian companies’ ability to borrow in the international markets would not be affected. This is not proving to be true if you compare the prices Indian borrowers are paying now with what they were paying in late 2006.
A case in point is Tata Steel. In late 2006, it took a bridge loan of $1.78 billion to finance the acquisition of Corus Steel. The spreads on the bridge loan were 47 basis points (bp—a basis point is a hundredth of a percentage point). The refinancing of the bridge loan, which was increased to $7.64 billion, closed in December 2007. It carried spreads ranging from 98bp to 289bp.
Indian borrowers have made aggressive moves into the loan markets and the convertibles markets on the back of a rising stock market and an appreciating rupee. Unless the markets rush back to highs over the next 12-18 months, convertible issuers will be saddled with a huge amount of unexpected debt. If the rupee starts depreciating, the pain will intensify.
The real estate market will also be hurt badly as some players have used funds from their recent public offerings to aggressively expand their geographical footprint over India by acquiring huge land banks. With the double whammy of the markets and the start of a decline in real estate prices, some of the smaller players are beginning to hurt. This of course represents an ideal opportunity for players such as Sam “The Grave Dancer” Zell, a billionaire real estate developer in the US, who had visited India in April last year and had been quoted as saying that the Indian real estate market “was on the brink of excess and would end in tears”. It was nothing but “mental masturbation” to keep believing that “there were endless riches for investors”. While there is no doubt that the market will slow down, the question on everybody’s mind is the extent of the damage. Will it be like the mid- 1990s, when the property markets pulled back almost 40-50% and stagnated until the early 2000s? Or will it be more short-lived?
The other dark cloud on the horizon is the threat of inflation as a result of increase in food prices and commodities, and the fear of an interest rate rise. The government is trying to talk down the market into holding back prices and interest rates but, like King Canute, it is going to be a futile exercise. Food prices will remain high until the next crop comes in.
My personal view is that the next 12 months will be difficult, but the first half of 2009 should see a bottoming out. With the government spending more on infrastructure, foreign investors ranging from Wal-Mart to automobile and telephone manufacturers taking a long-term view and continuing to make capital expenditure commitments, the economy should get a boost. The sun should start to shine in time for India to welcome visitors to the Commonwealth Games in New Delhi in 2010.
Avinder S. Bindra is CEO of ARX Analytics and Advisory.Comments are welcome at firstname.lastname@example.org