The fourth quarter of the 2008-09 fiscal year was expected to bring grim news of falling profits and stagnant revenues. The results announced by the so-called early birds are consistent with this expectation, bar a handful of exceptions.
But as bad these quarterly results are, the consolidated balance sheets of Indian firms that will be released later this year may bring even worse news.
The International Monetary Fund’s (IMF) World Economic Outlook released this week notes that the corporate sector could increase risk for emerging economies. India doesn’t fare well in this regard: IMF notes that, since September, the likelihood that corporations would default on their debt is the highest in South Asia among all emerging markets. As IMF points out, Indian companies are more highly leveraged than other emerging market ones.
That’s a hangover from the intoxicating days of India’s debt binge, thanks to a credit bubble at home and abroad. Much of this binge was due to the US Federal Reserve’s easy-money policy.
But companies that piled on debt shouldn’t be exonerated. They may not have brought the punchbowl, but they kept drinking from it.
Thus, firms such as Wockhardt gorged on foreign convertible bonds. Unitech financed its breackneck expansion with lots of short-term debt. Tata Motors and Hindalco bought foreign companies with the help of bridge loans. And thousands of smaller firms have repeated similar mistakes in the last stage of the credit bubble, participating in what economist Hyman Minsky termed the stage of Ponzi finance.
Little surprise then that credit rating agency Crisil, Standard and Poor’s India arm, has downgraded 84 entities in 2008-09 and upgraded only two. These downgrades are only hurting companies’ ability to secure debt at a time when, owing to slowing demand, they need it most.
In the case of Tata Motors, hedging a loan by buying insurance against the possibility of default is itself expensive now. According to the spreads on credit-default swaps, insurance for $10 million worth of one-year debt now costs $3.68 million from just $250,000 a year ago.
The stronger companies will ride out this storm; the weaker ones may perish.
Such is capitalism. This bust will inevitably make way for a boom a few years down the line. And, alas, the mistakes will be repeated.
Are Indian companies overexposed to debt? Tell us at email@example.com