Goldman spotlights India debt risk amid high-profile defaults

Corporates with debt-to-equity ratios exceeding 200% rise to 476 from 36 in 2005

T he number of Indian companies with twice as much debt than equity jumped tenfold in the past decade. Two defaults this month suggest that credit binge may end in regret.
Corporates with debt-to-equity ratios exceeding 200 per cent rose to 476 from 36 in 2005, data compiled by Bloomberg on 3,820 publicly traded non-bank entities show. Jaiprakash Associates Ltd, a power and property group, had the rating on its bank loans lowered to default last week due to a delay in servicing. Soma Isolux Surat Hazira Tollway's debt was also cut to a D.
"The stressed debt increase mainly comes from investment heavy sectors," Goldman Sachs Group analysts led by Kenneth Ho wrote in a report this month. "The weakness in commodity prices has been a contributing factor and we are also seeing stress among overcapacity sectors."
The fallout adds pressure on Prime Minister Narendra Modi to unclog some $212 billion of stalled infrastructure projects to bolster growth. Even billionaires at Tata Steel Ltd and Hindalco Industries Ltd are negotiating with banks to cut their interest burden as an economic slowdown and commodity price slump worsen finances.
"The nonperforming asset pain is not entirely over," Ranjan Dhawan, the chief executive officer of Bank of Baroda, said. "It will remain in the system for some quarters. Stress continues mainly in the infrastructure and steel sectors."Dhawan said the bank was staying away from additional lending to sectors such as steel, thermal power and textile. "In real estate, there is already an overhang. It's better to be safe than sorry," he said.
The stressed asset ratio at Indian banks climbed to 10.9 per cent as of March 31, up from 10.8 per cent on December 31 and 10 per cent as of March 31, 2014. More delinquencies won't come as a surprise for the Goldman Sachs analysts, who've warned of worsening credit profiles at least twice this year. Since 2012, listed companies in India have experienced the fastest increase in leverage among Asian borrowers through mid-2014, the New York-based investment bank said in a report in February. Those with the weakest interest-coverage ratio - or an Ebitda-to-interest expense of less than one time - took on 20 per cent more debt over the period, the most at any point over the past decade, it said in a July 17 note.
Credit Analysis & Research Ltd, or Care, downgraded Jaiprakash's debt to default after delays in servicing obligations on some Rs293 billion ($4.6 billion) of facilities. The company's debt-to-equity ratio jumped to 416 per cent as of March 31 from as low as 206 per cent in 2008, Bloomberg data show.
The downgrade came after Jaiprakash, based in Noida in India's north, restructured $200 million of convertible bonds before their maturity in February to avert a default. The 5.75 per cent 2017 notes slumped to a record-low 70.43 cents on the dollar on Wednesday.
ICICI Bank Ltd, State Bank of India, IDBI Bank Ltd and Standard Chartered are the four biggest lenders to Jaiprakash, accounting for about two-thirds of its Rs180 billion in bank debt in 2014, Morgan Stanley said in a July 24 report.
"Given the slowdown in the power and real estate markets, there would be pressure on liquidity, especially so when the company has substantial leverage," said D.R. Dogra, a Mumbai-based managing director at Care. "While an asset sale is an option, it would take time to materialise for any company under the stable but conservative economic environment." As such, there needs to be a speeding up of projects, he said.
Projects stalled
Some 46,000 megawatts of power projects in India face viability issues due to the lack of long-term power buyers, putting about Rs750 billion of loans that funded them at risk, local ratings firm Crisil Ltd said in a report last week.
Modi plans to spend another Rs700 billion on roads, ports and airports this fiscal year to reverse an investment slowdown in Asia's third-largest economy. The Reserve Bank of India has cut its repurchase rate three times in 2015, to 7.25 per cent from eight per cent. India's housing market is also sluggish, with home sales decreasing 20 per cent in the first half from a year ago, Knight Frank said July 28. "Many companies in India are leveraged and some pain is visible," said Abhishek Bhalotia, the London-based chief executive of Kotak Mahindra UK Ltd, part of the banking group that manages about $11 billion of assets globally. "Further rate cuts will help the situation."
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