India Inc in a fix on forex debt rollover

Many companies which had raised short-term foreign exchange loans don’t have the cash flows to pay these back. Most want to refinance the debt but dollars are not available and few banks are willing to roll over these loans.

Seshagiri Rao, deputy managing director, JSW Group, says the dollar has become scarce in the international market, as everyone wants to move to a safe haven. Short-term or long-term loans are not available at a reasonable cost.

Many Indian companies have raised money through foreign currency convertible bonds (FCCBs), some due this year and the next year. The problem is, a lot of this is short term debt that is unhedged, estimated at $65-70 billion.

Most companies whose FCCBs are falling due would like to roll over (re-borrow) these loans for six months. What has added to the problem is rupee depreciation which has made these loans more expensive.

The total exposure of banks to emerging markets is substantial. European banks alone have an exposure of $3 trillion (India’s GDP is $1.7 trillion) to emerging markets. In a crisis, they want to reduce their exposure and, hence, dollar loans are not available.

“If the rollovers are not available, companies will have no choice but to resort to costlier domestic borrowings and settle these loans,’’ said S K Joshi, former chief financial officer (CFO) of Bharat Petroleum.

This will force many companies to borrow at 13-14 per cent, as against four-five per cent for the FCCBs.

The rupee has depreciated 13.5 per cent since the US credit downgrade in August. When these companies had issued FCCBs, the rupee was trading at Rs 42-43 to a dollar. In fact, in 2007, the rupee traded at Rs 39 to a dollar.

When these companies go to pay back these loans, they have to shell out Rs 49-50 for every dollar.

‘‘If a company doesn’t have the cash flow, it will have to roll over and replace it with some other loans.

The problem will be serious for companies which don’t have adequate cash flows or if they are in middle of putting up a long-gestation project,’’ said Ravi Sud, CFO, Hero MotoCorp.