Tough times may lie ahead for Turkish and Indian companies whose decade-long foreign borrowing binge has culminated in a crash in the value of the lira and rupee, significantly increasing the burden of their dollar debt.
| Indian PM, Manmohan Singh |
That's because first, both countries have witnessed an explosive rise in private sector foreign borrowing from relatively low levels, and second, the lira and rupee have been at the sharp end of this summer's rout of emerging currencies, losing around 20 percent of their value against the dollar at one point.
They have since recovered some of those losses but counting back from 2008, both currencies have shed almost half their value against the dollar.
"You have seen the rupee depreciate so you will see (Indian) companies struggle from a debt servicing perspective," said Ani Deshmukh, director of Asia credit research at Bank of America/Merrill Lynch.
"Where (companies) didn't have dollar revenues to match the debt, there will be mark-to-market losses on debt plus deterioration in debt coverage ratios."
Bond issuance levels in themselves do not look alarming - since 2007, Turkish and Indian companies have borrowed roughly $50 billion each in bonds, Thomson Reuters data shows.
But counting other debt forms such as syndicated loans and trade credits, private sector external debt in each country has quadrupled since 2004 to around $200 billion, JPMorgan said in April. In India, adding in state-run companies, external debt would amount to $390 billion, according to official data.
Worse, short-term debt - which falls due in the next 12 months - has ballooned. In India it stood at around a quarter of total external debt by March 2013, having risen a fifth from year-ago levels, while Turkish firms have grown their short-term debt levels by a third since the end of 2012.
Turkish companies and banks must make over $150 billion in foreign debt payments in the coming year, according to data from Capital Economics, which estimates that Indian companies too must find well over $100 billion in this time.
"Even if currencies recover, the issue will not disappear. The risk is that 2-3 years down the road, some companies again face refinancing problems," said Zsolt Papp, who helps to run 1.3 billion euros ($1.7 billion) in emerging debt at Swiss wealth manager UBP.
NO DEFAULTS BUT OTHER PROBLEMS
The mismatch scenario is a familiar one - a 1997 crash in currencies such as the Korean won and Thai baht plunged over-leveraged companies into default, their spiralling debt almost causing sovereign insolvency.
Few expect a repeat of this. For one, most companies are in good shape compared to 1997 and many companies, such as India's Tata and Turkey's Koc, have evolved into multi-nationals that earn a hefty chunk of their revenues in dollars.
"We try to look for issuers with hard currency revenues, which is a natural hedge in the balance sheet," UBP's Papp said.
And syndicated loans are slowly re-opening as Europe's banks recover. Turkish loan volumes jumped to almost $14 billion in the May-June 2013 period, the highest in over 5 years.
But if default isn't likely, there are other risks.
Refinancing debt will become more expensive as global borrowing costs rise. Second, much of the old debt was taken out to fund business expansion at a time of booming economic and credit growth and that is no longer the case.
So higher refinancing costs, falling domestic revenues and a rise in bad loans at banks will all worsen debt coverage ratios - the cash flow available to meet debt payments.
"Upward revaluation of foreign currency debt will likely tighten covenant headroom," Moody's said, referring to the safeguards lenders often demand to ensure debt risk does not worsen. Breaching such covenants can be construed as default.
BofA's Deshmukh says that if the picture worsens, Indian companies may struggle to refinance, given the central bank's cap on borrowing rates at 350 and 550 basis points over LIBOR for three- and five-year debt respectively.
"Companies under stress will find it hard to meet LIBOR plus 550 bps if they are to raise funds. You have to allow them to pay more coupon if they are to refinance and that is still missing," Deshmukh said.
Eventually, corporate debt metrics affect the sovereign borrower as investors often reckon on at least partial government support.
Again, reserves-to-short term debt ratios make India and Turkey look among the most vulnerable in emerging markets. Indian reserves are around twice the value of foreign debt payments in the coming year, BofA/ML data shows, while in Turkey, short-term debt payments far exceed gross reserves.
In Mexico and Russia reserve coverage is 5 to 6 times.
That is why the cost of insuring exposure to India and Turkey via credit default swaps has risen by around 100-125 basis points since early-May, compared with an average 70 bps rise in emerging markets in general, data from Markit shows.
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