India: Corporate debt worth $99bn at risk of default

Corporate debt worth around INR 6.7tn ($99.3bn) is at risk of defaulting, warns India Ratings and Research agency. It states that around 240 of the top 500 corporate borrowers in the nation may be unable to refinance their debt that matures in fiscal 2017, warning that INR 4.6tn ($68bn) could already be delinquent. India's banks have already slowed down or stopped lending altogether to the stressed companies, says the ratings agency, as they are reeling under an unprecedented stock of soured loans of INR 5.8tn ($86bn) as of 31 March. Their pain will be further exacerbated if these 240 stressed firms fail to service their debt repayments. 

Mumbai: Corporate debt worth ₹ 6.7 trillion face risk of default as nearly half of the top 500 corporate borrowers in India may be unable to refinance their debt that matures in fiscal 2017, says a ratings agency report released on Tuesday.

“240 of the top 500 borrowers belong to the stressed and ERR (elevated risk of refinance) categories and will remain exposed to significant refinancing risk during FY17. These 240 borrowers hold about 42% of the total outstanding debt of ₹ 28.1 trillion i.e. ₹ 11.8 trillion, of which ₹ 5.1 trillion is stressed and another ₹ 6.7 trillion falls in the ERR (elevated risk of refinance) category," said an India Ratings and Research report on Tuesday.

The report warns that of the ₹ 6.7 trillion worth of debt, about ₹ 4.6 trillion could already be delinquent.

“ ₹ 4.6 trillion of the ₹ 6.7 trillion debt in ERR could already be delinquent, while incremental stress, if any, is likely to emanate from the remaining ₹ 2.1 trillion," the report said.

The top 500 borrowers form 32.1% of the total banking system’s outstanding loan as of 31 March 2015, and, in fiscal 2017, could still make up for 25-30% of the banking sector’s assets, the rating agency estimates.

While incremental lending by banks to less stressed companies has risen, disbursals to stressed and ERR firms have remained largely unchanged since fiscal 2012, the report said.

Banks have already slowed down or stopped lending to the stressed companies, said India Ratings.

Indian banks are already reeling under unprecedented stock of soured loans at ₹ 5.8 trillion as of 31 March 2016. Much of these bad loans have surfaced as a result of the Reserve Bank of India’s (RBI) asset quality review (AQR) which forced banks to recognize visibly stressed loans as bad. The pain for banks could exacerbate further if these 240 stressed companies fail to service their debt repayments.

India Ratings does not rate all of the 500 borrowers. The report segregates the top 500 borrowers into four categories: stressed, elevated risk of refinance (ERR), medium ease of refinance (MER) and high ease of refinance (HER).

Out of these 500 borrowers, 157 are under ERR segment and 83 companies are stressed. Companies that have reasonable ease in refinancing are 152 in total categorized as MER. The rest of the companies are well placed to raise funds.

Companies which are stressed have defaulted on their debt payments in some form, the ratings agency said. Those under ERR will find it difficult to honour their debt obligations.

About 66% of the ₹ 2.09 trillion worth of debt that matures in fiscal 2017 originates from the 240 companies that belong to either the stressed or the ERR segment, the report showed.

ERR companies are characterized by their low interest cover ratio (below 1), an alarming increase in the pledged shares, limited flexibility of sponsors and inadequate liquidity.

Such companies will have to resort to asset sales if they want to meet their debt obligations, the report said. Some companies have already monetized their assets which provide some relief, the report added.

But, the trouble runs deeper, as refinancing needs of stressed and ERR firms are far higher at more than 50% of their debt compared with less than 40% in the case of firms that may find it relatively easy to refinance, the India Ratings report said.

For instance, companies in the HER category have only 10% of their loans maturing in fiscal 2017 as against 68% of loans that mature for stressed companies.

Another layer of concentration is that more than 60% of the ₹ 2.09 trillion debt that is up for refinancing originates from just 50 companies.

The sectors from which these stressed companies originate are mainly infrastructure and others linked to infrastructure such as power, iron and steel, cement, and metals and mining.

A key risk also emanates from the fact that 72% of companies that are unrated fall in the ERR category. “Transition risks for the ERR category entities rated at A and above (20%) would be significant given their weak financial performance. Further disclosure risks remains a concern for the ERR category entities which does not have any rating outstanding from a rating agency," the report said.