Most rated Indian companies have protections against weaker rupee, says Moody's

External commercial borrowings has provided the best route for companies and developing nations to raise capital because, when compared to the emerging markets, interest rates are low in developed economies. In fact, ECBs accounted for 36.8 per cent of India’s external debt as of the end of December 2021.

External Commercial Borrowings (ECBs) represent a major component of India’s overall cross-border capital flows, which are influenced by various pull and push factors. These are in the form of cash bonds, securitised instruments, preference shares (non-convertible/optionally or partially convertible) and some hybrid instruments such as Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs) raised by eligible resident entities from recognised non-resident entities.

According to RBI data, Ambani and Adani together borrowed more than $1 out of every $5 from foreign lenders. In total, Indian companies borrowed $38.2 billion from foreign lenders in 2021-22. Mukesh Ambani’s Reliance Industries and the Gautam Adani-led companies borrowed $8.25 billion.

In the last eight years, Indian companies have borrowed nearly $260 billion from foreign markets—this includes capital markets, commercial banks, and equity investors, among others.

BOB, in a research note, said in terms of the purpose of ECBs, on-lending or sub-lending is the dominant reason for firms to borrow funds from abroad. Its share stood at 21.5 per cent in FY22.

In the year ended March 2022 (FY22), ECBs approvals had risen to $38.2 billion from $34.8 billion in FY21.

Companies also utilised funds mobilised through ECBs to fund earlier ECBs. The share of this category stood at 18.4 per cent in FY22.

The refinancing of rupee loans through fresh ECB approvals has increased from just about 6.5 per cent in FY17 to 13.2 per cent in FY22. BOB said that ECBs are also increasingly being mobilised for new projects as well as the modernisation of existing projects.

However, ECBs issues will moderate in the coming months as monetary policy tightens and the rupee continues to depreciate.

The rupee slipped 13 paise to hit its intra-day record low of 77.81 against the US dollar on Thursday. The Indian rupee has been under pressure in the last one year, moving from the levels of 72.77 per dollar to 77.93 per dollar. So far in the calendar year, the domestic unit is down about 5 per cent.

Naturally, Companies who hedge their currency positions will be shielded from currency fluctuations, while those without will see their margins erode.

Companies with Hedge Position

Rating agency Moody's said on Thursday that most rated companies in India have protection against a weaker Indian rupee and hold buffers to withstand a further 10%-15% depreciation of the currency.

Higher energy prices and interest rates in developed economies have led to capital outflows and rising commodity prices, pressuring the rupee, it said.

Moody's said the rupee's depreciation is credit negative for companies that generate revenue in rupees but rely heavily on US dollar debt to fund operations, as well as for those with significant dollar-based costs, such as raw materials and capital spending. However, the negative credit implications for rated companies will be limited.

“Most rated companies have protection to limit the effect of currency fluctuations. These include natural hedges in the form of revenue and costs denominated in or linked to the US dollar, some US dollar revenue and financial hedges, or a combination of these factors, which help limit the adverse effects on cash flow and leverage, even under a more severe deprecation scenario,” Moody's said. 

On the other hand, exporters could benefit as their services or products become cheaper and therefore more competitive in the global market. However, in the current macroeconomic environment, the benefit will likely be limited amid weak global demand and rising inflation, the rating agency added.

Moody's said nearly half the 23 rated India-based companies have natural hedges that mitigate their exposure to rupee weakness.

For another four companies, their global operations provide the ability to match foreign-currency debt service with foreign-currency cash flows, often at the subsidiary level.

The remaining companies either use financial hedges to manage their exposure to US dollar debt costs, have low exposure to rising US dollar debt costs, or have a combination of the factors to help limit the strain on cash flow and leverage, even under a more severe deprecation scenario.

Four rated companies together have around $2.5 billion of rated US dollar bonds maturing over the next 12 months through May 2023. Capital markets remain volatile and investor appetite remains selective, so refinancing risks will remain elevated, particularly for high-yield companies.

The rating agency said Vedanta Resources Limited accounts for a large portion of the upcoming bond maturities. Its negative outlook reflects persistent risks associated with liquidity. Despite the large cash dividend the holding company will receive, which will help pay for some immediate cash needs, including its July bond maturity, substantial debt maturities, and the holding company’s reliance on cash dividends and refinancing, keeps the outlook negative.