Tough time awaits for Indian INC - debt burden

Indian companies have to redeem around $44.57 billion of overseas debt between now and December 2009 in an economic environment where money has become scarce and costly. This debt funded for their domestic expansion and overseas acquisitions.


This is a pretty big issue, as the cost of borrowing could remain high for some time to come.To be sure, some of the companies, such as Hindustan Zinc, say they have repaid their loans ahead of schedule.Most companies, however, usually pay their debts only when they are due or, if the foreign currency is appreciating, replace foreign debt with local borrowings. This means Indian firms will find it difficult to roll over their old debt and raise new debt. This will affect their expansion plans as bankers do not expect the scenario to change anytime soon. Apart from the cost of borrowings, Indian firms also need to take forward cover for their overseas loans to hedge the currency fluctuation risk when they pay back their loans by buying dollars from the market. The local currency has lost at least 20% against the greenback this year.


When the Libor rose sharply—reflecting the rise in credit risk in London—the rates at which the Indian firms had borrowed went up. Beyond the rise in debt servicing, Indian firms and banks also saw the cost of rolling over their maturity debt rise sharply as the money market in London dried up. As the costs of rolling over debt rose sharply, Indian firms borrowing in London found themselves structurally short of dollars. They responded by borrowing in the Indian short-term money market, converting the funds into dollars, using the proceeds to meet external debt obligations.