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The pressure on rupee may continue for some more time as close to $33 billion in foreign debt of Indian companies is set to mature by March 2014. Weak rupee and rising interest costs will not only make refinancing relatively more expensive for Indian companies but also push up overall debt levels.
Given that the current exchange rate for the rupee against the USD is about 15% below where it was on 31 March, Moody’s says, if the companies’ total reported debt increases owing to foreign exchange moves, their financial covenant cushion will likely decline, particularly with respect to interest coverage and debt service coverage ratios, as the rating agency expects their interest costs to increase as well.
However, companies with the largest debt maturities through March 2014 are also the ones with the most access to funding, Moody’s maintains.
The four oil and gas companies, Oil and Natural Gas Corporation Limited (with a rating of Baa1 stable), Reliance Industries Ltd (Baa2 positive), Bharat Petroleum Corporation Ltd (Baa3 stable) and Indian Oil Corporation Ltd (Baa3 stable), account for 60% of total rated Indian corporate debt maturing through March 2014. These companies have more than $13.4 billion (Rs 90,000 crore) in debt denominated in foreign currency, which is set to mature by March 2014.
These companies would continue to have access to funding – both domestic and international funding – due to their size and state-owned status. However, other companies with high foreign currency debt will face higher credit costs if they were to refinance their foreign currency debt.
The rating agency believes that companies like IOC, Tata Steel Limited (TSL, Ba3 negative) and Tata Power Company (TPC, B1 negative) reported debt/EBITDA above 4x - 5x for the fiscal year ended 31 March 2013.
Weakness in demand and overall outlook for the sector will put cashflows under even greater pressure. Therefore, these companies will face high leverage levels and higher interest costs.
