Debt pile-up bogs down large groups

Debt pile-up bogs down large groups

Mumbai: Loans to 10 large corporate groups have ballooned fivefold to 5.39 trillion over the past five years, according to a recent research report, raising concerns of larger systemic stress that the burgeoning debt could create on banks, asset valuations and the repayment ability of debt-laden companies.

Loans to these 10 groups, including Adani Enterprises Ltd, the Essar Group, the GMR Group, the GVK Group, the Vedanta Group and Videocon Group, have increased from 99,300 crore in fiscal year 2007, said the report by Credit Suisse Group AG analysts Ashish Gupta and Prashant Kumar.

The debt has grown at a compounded annual growth rate of 40% between fiscal 2007 and fiscal 2012—double the pace at which overall loans in the banking system increased. The debt pile-up has raised the “concentration risk"—the probability of losses resulting from skewed exposure to a few companies.

Adani Enterprises and Anil Ambani’s Reliance Group declined to comment for this story. Five others—GVK, the Jaypee Group, the JSW Group, Vedanta and Videocon—didn’t respond to requests for comment sent on 14 August at the time of going to press.

The three groups that responded—Essar, GMR and Lanco Infratech Ltd—downplayed the absolute levels of debt, saying they would be able to service their loans out of their cash flows.

Experts warn that the debt may bring more pain for both the lenders and borrowers.

“In FY12, over 20% of the incremental loans came from just ten groups....and now equates to 13% of the total bank loans and 98% of the net worth of the banking system. Each of these groups alone now accounts for 1–2% of total banking system loans," said the Credit Suisse report.

These business groups have exposure to projects in power, metals and infrastructure sectors.

Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd, traces the roots of debt pile-up back to the bull market of the last decade.

“The risk appetite in our country and overseas vis-à-vis India went up significantly around 2006. And this showed up in both accelerated equity and debt financing. There was a lending binge by Indian banks as well as the global banks through their ECB desks," he said. ECB stands for external commercial borrowings.

The tap remained open even after the 2008 global financial meltdown as “the delusion of hard collateral persuaded banks to continue lending to Indian power and infrastructure projects well into 2010... The party more or less continued until two years back", Mukherjea said.

The scandal surrounding alleged wrongdoing in the 2008 allocation of 2G spectrum and licences broke and the investment themes surrounding the power and infrastructure sector busted, and “now you have the aftermath of that party", added Mukherjea.

“All the mistakes happen in good times," SMC Global Securities Ltd’s head of research Jagannadham Thunuguntla said. The “debt boom was fuelled by the bull market in 2006 and 2007 when companies took on too many projects", depending too heavily on debt financing and trusted cash flows from the projects to justify the debt.

“But some of those projects fizzled out and others ran into unforeseen difficulties. Market capitalization can reduce, valuations can disappear, but debt remains exactly as it is," Thunuguntla said.

The worst part is not the debt pile-up in itself, it is the inability to fathom how deep the rot is.

“Most lenders are underestimating the leverage of the promoters. It is very difficult to peg how much debt listed companies are liable for because there are multiple layers of debt," Mukherjea said, pointing to possible leverage with special purpose vehicles, promoters as well as the guarantees that listed companies may have provided for other group firms’ loans.

Pawan Agrawal, a senior director at Crisil Ratings, zeroes in on sectors such as infrastructure, textiles, telecom, steel and real estate that have become heavily debt-laden over the past few years.

Sandeep Bhatnagar/Mint

A spokesman for the Essar Group refuted the debt figures and said it was “incorrect" to say the group was highly leveraged.

“The majority of the debt has been taken by individual companies for financing specific projects", “sanctioned based on globally accepted debt-equity ratio" and “in most cases assets cover is amongst highest in the industry today", he said in an email response.

“Absolute volume of debt should not be a concern as long as cash flows support such volume regardless of its size," said a GMR spokeswoman, adding that banks and investors look at various other leverage ratios too, such as “debt-equity ratio, debt-service coverage ratio, interest to Ebitda (earnings before interest, taxes, depreciation, and amortization), debt to Ebitda, etc".

She said it was natural for infrastructure businesses to have much larger debt and much of it is “project finance" which “gets repaid from the project cash flows through its life cycle".

Dheeraj Sood, head, investor relations, Lanco Infratech, added that many of his group’s projects had become operational and that the company was taking steps to pare debt.

“We are also looking to monetize some of our non-core assets like roads (three highway projects) and our wind portfolio. We are also looking to raise around $750 million in private equity investment at the power holding company level," said Sood, adding that nearly 2,900 crore was outstanding from various state utilities as well.

Banks, on their part, are forced to roll over debt to these big corporate clients to hold onto them as well as keep their books clean.

“Default is not a part of the culture in India. So we keep finding a way around it. If the banks force (corporations to pay up) too far, they’ll end up with NPAs (non-performing assets), so they have to play along (in refinancing the loans)," said Thunuguntla.

A public sector bank’s executive director said, “When you ask for your money back, it will become an NPA. Companies close their loans (by) taking other loans. And as they close loans, their credit limit increases. And the cycle goes on."

Another public sector bank’s chairman refuted this logic, saying the rise in debt levels should match the revenue and profit growth in these groups.

“If the company grows, its debt requirement also rises," he said, adding that there was a very slim chance that these big companies would default.

Ambit’s Mukherjea estimates that 9-10% of system-wide loans are bad, which the banks are able to paper over.

Rating company Crisil has pegged “incremental restructuring" of corporate debt at 2 trillion in fiscal 2012 and fiscal 2013. Of this, nearly 45% will be in the current fiscal.

To be sure, there are some companies on the other end of the spectrum that are flush with cash and have too few avenues of putting it to use. This lot includes Mukesh Ambani’s Reliance Industries Ltd, state-owned Coal India Ltd and computer services provider Infosys Ltd.

Crisil’s Agrawal, too, said the top 50 companies rated by Crisil were equipped “to navigate this difficult operating environment", benefit from their size and diversity, have had stable debt-equity ratios for the last two years, and have access to group support and lenders for financing.

Credit Suisse analysts refer to assets of debt-laden groups on the block, but said “the demand for these assets may be limited".

While a fire sale of assets is one option, raising equity is another.

“It is critical for some to raise equity while others may undergo (loan) restructuring, but that will require some forbearance on part of the lenders," said Agrawal. “Some may have to sacrifice their ambitious growth agenda by shelving projects or selling assets."

All options, however, come with some degree of pain.

Anup Roy and Zahra Khan contributed to this story.