Stocks of some of the companies whose external commercial borrowing loans are maturing in the November to December period have registered their 52-week lows today. Some of these are Brakes India Ltd, India Glycols and Bajaj Hindusthan while companies such as Paramount Communications and Balrampur Chini had touched their 52 week low last week.
The sudden fall of the rupee has hit Indian companies that have raised funds overseas through external commercial borrowing route. Dropping to a 32-month low of Rs 52.35 and declining by 18 per cent since the beginning of the year, the rupee has made repayments dearer.
During the calendar year 2011 till date, Indian corporates have raised about $30 billion or Rs 1,50,000 crore through ECBs. Due to the declining rupee, this burden has increased by about Rs 27,000 crore, said a report from SMC Global Securities.
While companies whose loans are maturing currently will be the worst hit, even the others would be affected as they have to make provision for the marked-to-market losses on their loans.
“There are so many companies who have borrowed money through the ECB route. Companies who have to repay their ECBs at this point of time are the ones who will be most affected by the decline in rupee,” said Mr Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities. “Also, as per the ICAI guidelines, marked-to-market losses on forex need to be provided on quarterly basis in the financial statements.”
Take for instance United Phosphorous. The company borrowed $ 147,825,273 for an overseas acquisition in October 2006. The maturity period for this money was 5 years ending October 2011. A financial results report of United Phosphorous by Emkay Global Financial Services says: “Currently, gross debt stands at Rs 40 billion while company held cash of Rs 18 billion in its books. Around three fourth of the company's debt is in the form of External Commercial Borrowings (ECBs). Management indicated that they are likely to repay a significant chunk of debt (to the tune of 25-30 per cent of gross debt) in the third quarter. Current interest cost is 7-7.5 per cent p.a. and is likely to stay at these levels.”
To ease the burden of paying the entire amount at one time, most companies hedge their borrowings. Transport Corporation of India (TCI) had borrowed close to $ 11 million in October 2006 for the purpose of purchasing a minor ship. “We have hedged the borrowing and repaid most of it. We have to repay only $0.5 million now,” said Mr Vineet Agarwal, Executive Director, Transport Corporation of India.
When the rupee depreciates, it is not only the loan, but the interest payment that also becomes expensive, said Mr Pramit Brahmbhat, CEO, Alpari Forex. Usually, the tendency among borrowers is to hedge or cover the loan amount and not the interest part. Therefore, the fall in the rupee will have an impact on foreign currency loans to that extent, he added.
Given the debt crisis in the Euro zone and the liquidity shortage overseas, foreign banks are not willing to lend to emerging markets anymore, which makes it difficult for Indian borrowers to roll over their existing loans, said Mr C.H. Vikas, senior dealer with Andhra Bank.
Hence, companies faced with repayments may have no option but to repay at higher exchange rates.