FX Repayment Blues

IntroductionDid you know that Indias repayment of all Forex loans over next 2years is $45bn, which is the highest across all countries in Asia? IndiasFX loan repayments over next 2 years account for 15% of Forexreserves, the highest after Indonesia. On the positive side, Indias next 2years FX repayments as % of GDP are similar to the rest of Asia at 2.2%.We answer 4 questions in this regard:

Question 1:How big a threat is this to Balance of Payments (BoP)?We have assumed a net inflow of $12bn from Forex loans in FY13 in ourBoP estimate. Given the huge repayment of $23bn, this could be at riskif (a) Indias credit rating concerns leads to low rollover of Forex loansor (b) given rupee volatility, borrowers prefer rupee loans instead. In1HCY12, we have seen only $2.6bn raised in USD syndicated loans vs.$7bn in 1HCY11 and $17bn for CY11. However, the relief is that Indiancorporates were able to raise US$8.2bn of ECB (External CommercialBorrowing) & repay US$5.9bn in the Mar12 quarter.

Question 2:So does this affect the rupee?While the falling oil prices and lower demand for gold imports are bigpositives, a bunching of repayments towards maturities of foreigncurrency loans could lead to intermittent swings in Rupee. One bigbunching of repayment was in June with nearly $6 billion of dues. TheRupee will get some relief from Forex repayments till Sept/Oct whenover $8 billion of Forex loans mature. Our FX strategists expect the INRto be around Rs57/USD by September.

Question 3:Is there a default risk?We believe Indian banks have close to $7 billion of foreign currencyrepayments due till March, 2013. Of this the biggest chunk is from ICICIBank followed by SBI and Bank of Baroda. Our bank analyst, RajeevVarma, believes the banks have minimal ALM mismatch and would nothave a problem in repaying the loans. However, there is a bigger threatof default amongst companies that have issued FCCBs (ForeignCurrency Convertible Bonds). We estimate there are 48 companies witharound $5 billion of FCCBs due in FY13 (of which 8 companies havealready redeemed around $1bn). Of the $4 billion of FCCBs due overthe rest of FY13, we think it is unlikely that any of them will beconverted. We believe there are likely to be some defaults amongst themid-cap and small cap companies on their FCCB dues where earningsprofile is weaker.

Question 4:Will earnings of companies be hit?Most companies write off the impact of rupee depreciation and theredemption premium through the balance sheet. Hence, the earningsof companies are largely unaffected. The bigger impact will be felt onfuture interest cost of companies if they re-finance through a rupeeloan. For example, for FY14, we estimate Adanis EPS will be hit by 6%and RCom by 4% due to higher re-financing costs. Similarly, for thecompanies which re-pay the FCCBs, we expect a substantial hit tofuture earnings due to higher re-financing costs.

FX Repayment Blues

by Kotak Securities on Jul 10, 2012

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FX Repayment Blues Document Transcript