Refinancing Risk India Ratings 09.01.14

8/13/2019 Refinancing Risk India Ratings 09.01.14

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Corporates

www.indiaratings.co.in 9 January 2014

India

Refinancing Risk: Top 100 Corporate BorrowersLenders Dilemma

Special Report

Refinancing Risk, Borrower Concentration: Of the total exposure of Indian banks to the

industrial sector, an estimated 46% is attributed to the debt of top 100 corporates (non-financial

and non-public sector). Ind-Ra in August 2011 was one of the first to highlight the concentration

risk. An estimated INR1.9trn-INR2.1trn of these loans is due for refinancing in the next 12-15

months. This amount is around 27%-29% of the aggregate net worth of the banking system as

at end-FY13.

The refinancing requirement may present significant challenges to lenders. Around 24% of the

refinancing requirement (about 4%-5% of the banking system net worth) is attributed to thecompanies already in distress. The report focuses on the relative ease (or difficulty) with which

74 (out of 100) corporates may be able to refinance the debt obligation.

Negligible Refinancing Risk for 26 Corporates:26 of the 100 corporates with the estimated

bank exposure of INR3,466bn have no significant refinancing exposure or negligible

refinancing risk (NRR)till FY15. They have a moderate amount of debt maturing or are likely to

have sufficient free cash flows to service the maturing debt.

Manageable Refinancing Risk for 34 Corporates: Of the balance of 74 borrowers, 12

accounting for 27% of the refinancing requirement will be able to refinance debt at a

reasonable cost even under stressed market conditions. This category is referred to as high

ease of refinancing (HER). The remaining 22 corporates accounting for 23% of the refinancingamount will also be able to refinance with moderate ease. This is referred to as moderate ease

of refinancing (MER). However, they may have to bear a high cost, especially under stressed

market conditions.

Elevated Risk to Refinance for 20 Corporates: 20 corporates accounting for 26% of the

refinancing amount have weaker credit metrics than that of the previous two categories.

Generally, as a group, their asset coverage ratios are low and financial flexibility of the

promoter is also limited. Under normal market conditions, they should be able to refinance at a

high cost or with stringent covenants. However, this group may face significant challenges in

refinancing during stressed market conditions. This is referred to as elevated refinancing risk

(ERR).

Entities in Stress:Among these top 100 banking system exposures, 20 are already in distress

to the extent that some of them have been tagged as defaulters or are undergoing some form

of restructuring. An estimated 24% of the refinancing requirement may be attributable to such

corporates. However, so long as some of these entities successfully restructure their

obligations, the upcoming refinancing requirement for this category may be significantly lower.

Incremental Exposure:The banking sector, possibly undertaking a cautious approach, has

limited incremental loans to the companies in the ERR and stressed categories as evident from

the declining proportion of bank loans to the total debt over FY12-FY13. The upcoming

refinancing requirements may present a dilemma to bankers. Given the low median asset cover

of corporates in the ERR category and low median coverage ratio (FY13: 1.4x), the amount to

be refinanced and at what price may not be an easy decision for banks. Limited non-banking

funding options and the challenges of post default recoveries could also have a role to play.

Related Research

Mounting Concentration Risk Could Test IndianBanks

Balance Sheet Strength of BSE 500 Corporates

Impact of Interest Rate Hike on BSE 500Corporates

Analysts

Mahaveer Jain S

+91 22 4000 1768

[email protected]

Deep N Mukherjee

+91 22 4000 1721

[email protected]
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Corporates

Refinancing Risk: Top 100 Corporate BorrowersJanuary 2014

2

Background

Ind-Ra was possibly the first one to flag off the concentration risk inherent in the Indian banking

system (refer to: Mounting Concentration Risk Could Test Indian Banks, published on 23

August 2011). The concentration risk remains broadly the same over the last 28 months.

However, a significant number of such high-value loans will be up for refinancing over the next12-15 months. At least some of these corporates have experienced significant erosion in their

balance sheet strength since 2011. Thus, the refinancing decision of some of these corporates

may present a significant underwriting challenge to their lenders. For such cases, lenders may

have to choose between increasing their exposure to a potentially deteriorating credit or

triggering an immediate liquidity crunch in the corporate. Additionally, some of the corporates

having refinancing requirements are known cases of distress1.

Methodology

Ind-Ra has analysed the100 largest banking sector corporate2exposures of domestic banks.

However, for estimating the refinancing requirement of these 100 corporates, the current

maturities of all types of debt (bank loans and capital market debt securities) have been

considered. For arriving at the refinancing requirement, the agency has assumed theparameters such as operating cash flows, finance cost, working capital requirements and

consequently the free cash flow to firm (FCFF) for FY14 and FY15 to remain around the FY13

levels moderated by the latest available interim performance. Refinancing requirement is

computed as FCFF minus total debt service (current maturities and finance cost) or total debt

service if FCFF is negative.

Any material improvement in these parameters would reduce the refinancing requirement. On

the contrary, deterioration in these parameters may enhance the refinancing requirement.

Refinancing Requirement

Among the 100 largest corporate exposures considered in this study, 74 have a meaningful

refinancing requirement. In FY14, the 100 largest corporates, in terms of balance sheet debt,

are estimated to have refinanced maturing debt to the extent of INR1,640bn. Furthermore, Ind-

Ra estimates that these 100 corporates are likely to have a refinancing requirement of around

INR1,750bn in FY15. Ind-Ra estimates that one-fourth of the refinancing amount in FY14 along

with the entire FY15 refinancing amount may be the total requirement by these 100 corporates

in the next 12 to 15 months.

Around 26 corporates are estimated to have limited or no refinancing requirement. Some of

these corporates do not have significant debt (relative to balance sheet size) maturing till FY15

or have sufficient free cash flows or cash (and cash equivalent) to service the upcoming debt

maturities.

Categorisation of Refinancing Risk

Out of the 100 corporates, 74 corporates with a meaningful refinancing requirement have been

analysed for their ability to refinance. The key factors considered are FCFF against debt

service requirement, credit metrics, unencumbered assets, market access and financial

flexibility of founder

These 74 companies requiring refinancing have been divided into four groups, with the features

as given in Figure 1.

1

The corporates are rated at D by rating agencies, or are undergoing some form of debtrestructuring to avert further distress or are tagged as non-performing assets by banks

2 These 100 largest borrowers include non-financial, non-banking corporates. The PSUs, financecompanies and subsidiaries of identified holding companies have been filtered out while identifyingthese 100 corporates

FCFF is reported operating cash flow

minus maintenance capex. Reported

depreciation is assumed to be the

maintenance capex.

For the purpose of this analysis

stressed market conditions are

defined as:

Stressed funding liquidity conditions

causing a sharp rise in interest rate

Significant credit rationing exercised

by the banking system in response to

a spike in systemic defaults
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Corporates


3

Figure 1Category Parameters And ImplicationsCategory Assessment parameters Implications

HER 1. Strong credit metrics To be refinanced conveniently2. Higher proportion of unencumbered assets than

the refinance requirement;Pricing pressure not expected

3. Strong parentage and/or high financial flexibility of

promoter;

High likelihood to manage

refinancing even in stressed marketconditions

4. Strong market access(at least three of the above present)

MER 1. Less than three of the above factors are present;or all four are present at a relatively lower degree

To be refinanced conveniently

Moderate pricing pressureexpectedModerate likelihood to managerefinancing even in stressed marketconditions

ERR 1. Weak and deteriorating credit metrics; negativeFCFF

To be refinanced at significantlyhigher price/ stringent covenants;

2. Limited financial flexibility of founder In select cases, lenders maypotentially seek capital infusionsfrom equity holders/promoters

3. Relatively lower proportion of unencumberedasset than the refinance requirement

Elevated challenge to managerefinancing under stressed marketconditions

4. High proportion of the current maturity to totaldebt

Select companies in this group havesignificant monetisable assets whichmay provide comfort

Stressed Has applied for corporate debt restructuring(CDR)/Just out of CDR or rated D

n.a.

Source: Ind-Ra

The study focuses on the ease with which refinancing requirements may be met. By itself, this

exercise may not map fully to the credit risk based rank ordering of the same set of companies.

For example, it is possible to have corporates in the NRR category whose credit profile may be

weaker than that of typical companies in the HER or MER categories.

Refinancing Requirement Matrix FY14E and FY15E (in billion)

100

74 26

FY13 Bank Loan: INR6,814 FY13 Bank Loan: INR3,466

FY14 Refinancing INR1,640

FY15 Refinancing INR1,750

12 22

FY13 Bank Loan: INR1,552 FY13 Bank Loan: INR1,340 FY13 Bank Loan: INR2,564

FY14 Refinancing INR436 FY14 Refinancing INR385 FY14 Refinancing INR428

FY15 Refinancing INR465 FY15 Refinancing INR481 FY15 Refinancing INR535

20

FY13 Bank Loan: INR1,358

FY14 Refinancing INR391

FY15 Refinancing INR489

Source: Ind-Ra Estimates

Top 100 Borrowers

FY13 Bank Loan: INR10,343

FY13 Total Debt:INR16,417

Need Refinancing

HER

Does Not Need Refinancing

ERR

20

MER

Stressed

Under normal market conditions, the agency expects corporates belonging to the three

categories namely HER, MER and ERR to be able to refinance. For the sole purpose of this

exercise, the agency has assumed that the current level of economic activity and interest rate

does not change either adversely.


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Corporates


4

Profiling the Refinancers

Around 73 of the top 100 corporates (85% of the total exposure) are rated by different agencies

in the investment grade on the domestic scale (BBB- and above). About 50% of the

refinancing requirements are with corporates who are already in distress or may have

weakened ability to refinance in stressed conditions.

Figure 3 Figure 4

Credit Metrics

The median credit metrics (select) of the borrowers in the distressed and ERR categories are

significantly weaker than the other three categories for at least the five years ended FY13. In

line with the systemic deterioration in leverage in the last four years (refer: Balance Sheet

Strength of BSE 500 Corporates,published July 2013), all the five categories have exhibited

deterioration of credit metrics

The median interest coverage of the borrowers in the distressed category is already below

1.0x, while that of ERR is 1.4x. As such, a rise in interest rate or a fall in margins may push

some of the weak corporates in the ERR category to financial distress.

Figure 5

0

1

2

3

4

5

6

FY09 FY10 FY11 FY12 FY13

NRR HER MER ERR Stressed(x)

Median EBITDA Net Interest Cover

Source: Ace Equity/Ind-Ra

Figure 2

Ratings Distribution of Top

100 Borrowers


Investment

grade

85%

CDR/D

12%

Unrated

2% Sub-Investment grade

1%

NRR36%

ERR21%

HER17%

Stressed13%

MER13%

Total Debt by RefinancingRequirement Category


HER27%

ERR26%Stressed

24%

MER23%

Refinancing Requirement byCategory (Value)


Of the top 100 exposures, 14 are rated

by Ind-Ra (domestic scale) and 2 by

Fitch Ratings (international scale).

Around 23% of the total debt exposure

of the borrowers considered includes

entities rated either on domestic or

international scale.
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Corporates


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Figure 6

While the median leverage of the borrowers in the HER and ERR categories has marginally

improved, the median leverage for the borrowers in the distressed category has highly

deteriorated. The median leverage of the borrowers in the categories NRR and MER has

shown a higher rise in leverage.

Working Capital Cycle

Median working capital days are longest for the borrowers in the ERR and distressed

categories. The deterioration in working capital days for these two groups has possibly

stabilised. Median working capital days for the borrowers in the HER and MER categories have

shown a stabilising to improving trend.

Figure 7

However, there is relative deterioration in median working capital cycle days for the borrowers

in the NRR category.

Cash Generation

While median fund from operations (FFO) margin in the ERR category shadowed the

distressed group over FY11-FY12, FFO margin in the former stabilised at five-year average

levels in FY13. For the NRR category, FFO margins improved over FY11-FY12. In the ERR

category, FFO margins are higher as the group is concentrated with construction and

infrastructure names, while CFO are much lower to that of the corporates in the NRR, HER and

MER categories. The construction and infrastructure sectors typically have significant working

capital requirements. Post adjustment for working capital, CFO for such sectors would be lower

than that for the auto, telecom and steel sectors.

0

5

10

15

20

25

0

2

4

6

8

10


NRR (LHS) HER (LHS) MER (LHS) ERR (LHS) Stressed (RHS)(x)

Median Net Leverage


(x)

-10

10

30

50

70

90


NRR HER MER ERR Stressed(Days)

Working Capital Cycle Trend


FFO is reported cash flow fromoperations (CFO) before working

capital changes.


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Corporates


6

Figure 8

Real Investment

ERR stands out in Figure 9 with a high of percentage of capex to sales ratio, as the category

includes large infrastructure and steel names. The decline in the capex/sales over 2012-2013

indicates scaling back or delays in capex outlay.

Figure 9

Promoter Flexibility

The distressed category has the most significant portion of promoter holding which is already

pledged. While borrowers in the ERR category have a lower proportion of promoter shares

pledged than distressed companies, still the promoters flexibility in the former category to

bring in cash is much lesser than the founders of the borrowers in the HER and MER

categories.

Figure 10

Asset Cover

While companies in the NRR category have the highest asset-cover ratio, companies in thedistressed category have the lowest asset-cover ratio. A low ratio limits the availability of

secured loans and by an extension also affects market access with respect to debt funding.

MER-category corporates have a higher asset-cover ratio than both HER- and ERR-category

0

10

20

30


NRR HER MER ERR Stressed(%)

Funds Flow from Operations Margin Trend


0

10

20

30

40

50

60


NRR HER MER ERR Stressed(%)

Capex to Sales


0

20

40

60

80

0

4

8

12

16

Mar 10 Mar 11 Mar 12 Mar 13 Sep 13

NRR (LHS) HER (LHS) MER (LHS) ERR (LHS) Stressed (RHS)(%)

Share Pledge Ratio to Total Promoter Holding


(%)


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Corporates


7

corporates. This to an extent is likely to provide some support to their refinancing activity even

in stressed market conditions.

Figure 11

Ind-Ra observes that the HER median ratio is lesser than that of MER which is counter

intuitive. However, a weaker ratio is mainly due to a bunch of corporates in this category having

a strong parentage (refer to the list of top 100 borrowers at the end of the report).

Industry

Refinancing risk is concentrated in four sectors namely construction, steel producers, telecom

and automobile. These four sectors constitute about half of the total re-financing requirement.

Construction (engineering/infrastructure) constitutes 25%, steel 12%, telecom 10% and

automobiles 5% of the estimated total refinancing requirement. Power, auto ancillary, real

estate and diversified manufacturing follow the suit, each constituting around 4% of the total

refinancing requirement.

The construction and steel sectors dominate all the four categories. While textile and airlines

show up in the ERR and stressed categories, auto and telecom show in the HER and MER

categories.

Figure 12

Evolving Credit Metrics

1H14 results are available for 43 of the top 100 borrowers. Ind-Ra observes that the median

EBITDA margins marginally declined to 17.5% in 1H14 from about 18.1% in 1H13 while total

debt between end-FY13 to end-1H14 remained negligible. Also, close to 80% of the debt

exposure has seen deterioration in EBITDA interest coverage. As such, the aggregated credit

metrics of the top 100 exposures are unlikely to improve significantly in the short term.

0.0

0.3

0.6

0.9

1.2

1.5

1.8

NRR HER MER ERR Stressed

2012 2013

Category-wise Total Asset Coverage Ratio Trend

(x)


0%

20%

40%

60%

80%

100%

HER MER ERR Stressed

Steel Construction/Infra. Airlines Textile Auto Telecom

Category-wise Industry Concentration

Construction includes Engineering-Infrastructure Auto includes Auto AncillarySource: Ace Equity/Ind-Ra


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Corporates


8

Figure 13 Figure 14

Refinancing Risk and Indian Banking System

Concentration Risk

The FY14E refinancing requirement is 23% of the estimated banking system net worth as of

end-FY13, while the FY15 refinancing requirement is 25% of banking system net worth.

Figure 15

The concentration risk inherent in the Indian banking system has also been observed with

respect to the refinancing requirement. As observed in Figure 15, 46% of the total refinancing

requirement is concentrated in just 10 large corporates while 80% of the refinancing

requirement is just with 30 entities of the total 100 borrowers analysed.

Incremental Exposure

The banking sector over the last few quarters has increased its exposure significantly to the

categories NRR and HER. While driven possibly by credi t rationing (at the bankers end),

exposure to the MER and ERR group has grown at a much more muted level. The potentially

low eagerness on the part of bankers may prove to be a challenge in debt refinancing to such

categories.

16

17

18

19

1H13 1H14

(%)

1H14 EBITDA Margins


0

15

30

45

60

75

90

Deteriorated Improved

(%)

1H14 Interest Coveragevs. as at FY13


0

20

40

60

80

100

120

10 Entities 20 Entities 30 Entities 50 Entities 70 Entities

(INRm)

Refinancing Concentration


Figure 16

0

4

8

12

16

NRR HER MER ERR

(%)

Median % Change in Debt as

at 1HFY14 vs. FY13

Based on Results of 43 of the top 100

corporates


Total bank loan exposure to the top

100 corporate borrowers increased

to INR10,229bn as of end-FY13, up

7.4% yoy.

The exposure represents 46%

(FY12: 49%) of the overall banking

system loan to the industrial sector.

Also, the exposure remained flat at

about 19% of the total banking

system loans (FY12: 19%, FY08:

15%).

Median EBITDA interest cover

declined to 1.7x in FY13 from 3.5x in

FY08.

Median net leverage (net debt/EBITDA) also deteriorated to 7.0x in

2013 from 5.1x in 2008.


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Corporates


9

Figure 17

While the cautious approach adopted by bankers has an intuitive explanation, the banking

system may face the dilemma that if refinancing decisions are not taken promptly (when

required) some of the large-value loans belonging to the ERR category may become

distressed. Also, the underwriting challenge may be posed because at least some of thesecorporates may have a low asset cover. Furthermore, given their low interest coverage a higher

interest rate (possibly reflective of their risk) may affect their debt servicing ability further.

Dependence on Domestic Banking

Another observable trend is that corporates in the NRR, HER and MER categories are

becoming less dependent on the domestic banking system. Given their credit metrics and

higher market access, they have shown an ability to access domestic capital markets or

significantly tap foreign currency markets. However, categories such as ERR and stressed

continue to have a high dependence on the domestic banking system.

Figure 18

As such, non-banking debt across categories consists of non-convertible debentures and

external commercial borrowings. However, the HER and stressed categories are mainly led by

the corporate groups having a sizable proportion of foreign currency convertible bonds.

-20

-10

0

10

20

30

40

50

60

70


Mar 10 Mar 11 Mar 12 Mar 13

Category-wise YoY Bank Loan Growth

(%)


50

55

60

65

70

75

80


Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

Category-wise Bank Loan Proportion Trend

(%)


The FY13 incremental borrowings by

the top 100 corporates constituted

24% (FY12: 61%) of overall

incremental loans to the industrial

sector.

Bank loans as a proportion of total

debt with these borrowers fell to 64%

in FY13 from about 66% in 2012.


10/12

Corporates


10

Figure 19Top 100 Corporate Borrowers

ParticularsIssuer Rating/Issuer DefaultRating/Outlook Category

Reliance Industries Ltd. IND AAA/Stable NRRBharti Airtel Ltd.

a BBB-/Stable NRR

Tata Steel Ltd. IND AA/Negative NRR

Hindalco Industries Ltd. NRRTata Motors Ltd.

a BB/Stable NRR

Sesa Sterlite Ltd. IND AA+/Stable NRRReliance Power Ltd NRRJindal Steel & Power Ltd. NRRGVK Power & Infrastructure Ltd. NRRIdea Cellular Ltd. NRRGrasim Industries Ltd. NRRCESC Ltd. NRRIRB Infrastructure Developers Ltd IND A-/Stable NRRMonnet Ispat & Energy Ltd. NRRUltratech Cement Ltd. NRRGreat Eastern Shipping Company Ltd. NRRGayatri Projects Ltd. NRRWipro Ltd. NRREID-Parry (India) Ltd. NRR

Motherson Sumi Systems Ltd. NRRCox & Kings (India) Ltd. NRRJubilant Life Sciences Ltd. IND A+/Stable NRRDr Reddys Laboratories Ltd. NRRUttam Galva Steels Ltd. IND A/Negative NRRCoromandel International Ltd. NRRWockhardt Ltd. NRRLarsen & Toubro Ltd. HERReliance Communications Ltd. HERTata Power Company Ltd. HERMahindra & Mahindra Ltd. HERReliance Infrastructure Ltd IND AA-/Stable HERAditya Birla Nuvo Ltd. HERReliance Gas Transportation Infrastructure Ltd HERIL&FS Transportation Networks Ltd. IND A/Stable HERTata Communications Ltd HER

Tata Chemicals Ltd. IND AA+/Stable HERVodafone Cellular Ltd. HERTata Teleservices (Maharashtra) Ltd. HERJSW Steel Ltd. (proforma) MEREssar Oil Ltd. IND BBB+/Stable MERDLF Ltd. MERTube Investments of India Ltd. MERAircel Ltd. MERJSW Energy Ltd. MERAmtek Auto Ltd. MERShree Renuka Sugars Ltd. IND A+/Negative MERUnited Spirits Ltd. MERTorrent Power Ltd. MERSistema Shyam TeleServices Ltd. MERFortis Healthcare Ltd. MERChambal Fertilisers & Chemicals Ltd. MER

Jindal Saw Ltd. MERKesoram Industries Ltd. MERCentury Textiles & Industries. Ltd. MERZuari Agro Chemicals Ltd. MERJBF Industries Ltd. IND A-/Stable MERNCC Ltd. MERAurobindo Pharma Ltd. IND AA-/Stable MERVardhman Textiles Ltd. MERBhushan Power & Steel Ltd. IND A-/Stable MERJaiprakash Associates Ltd. ERRGMR Infrastructure Ltd. ERRBhushan Steel Ltd. ERREssar Ports Ltd. ERRMercator Ltd. ERRKSK Energy Ventures Ltd. ERRAlok Industries Ltd. ERR

Bajaj Hindusthan Ltd. ERRRuchi Soya Inds. Ltd. ERR


11/12

Corporates


11

Figure 19Top 100 Corporate Borrowers (Cont.)

ParticularsIssuer Rating/Issuer DefaultRating/Outlook Category

Punj Lloyd Ltd. ERRRei Agro Ltd. ERRAdani Enterprises Ltd. ERR

Gitanjali Gems Ltd. ERRBharati Shipyard Ltd. ERRSadbhav Engineering Ltd. ERRBinani Industries Ltd. ERRAdhunik Metaliks Ltd. ERRSEL Manufacturing Company Ltd. ERRVideocon Industries Ltd. ERRRajesh Exports Ltd. ERREssar Steel Ltd. StressedLanco Infratech Ltd. StressedSuzlon Energy Ltd. StressedAban Offshore Ltd. StressedGTL Infrastructure Ltd. StressedJindal Stainless Ltd. StressedJet Airways (India) Ltd. StressedHindustan Construction Company Ltd. Stressed

Gammon India Ltd. StressedKingfisher Airlines Ltd StressedElectrosteel Steels Ltd. StressedIVRCL Ltd. StressedEra Infra Engg. Ltd. StressedMadhucon Projects Ltd. StressedGujarat NRE Coke Ltd. StressedHotel Leela Venture Ltd. StressedGTL Ltd. StressedBombay Rayon Fashions Ltd. StressedGOL Offshore Ltd. StressedMoser Baer India Ltd. StressedaRated by Fitch Ratings in International Scale



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Corporates

Refinancing Risk: Top 100 Corporate Borrowers 12

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Refinancing Risk India Ratings 09.01.14

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