| LONDON, Sept 17
LONDON, Sept 17 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.
These two markets stand out among developing nations whose
companies rushed to tap dollar financing in recent years.
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
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
"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
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.