A Fifth Of ‘Large Indian Borrowers’ May Soon Have Little Access To Debt

The Reserve Bank of India (RBI) could effectively have slammed the door shut on at least 11 large corporate borrowers looking to raise funds through debt. Norms released by the regulator in August will force these borrowers to move towards the corporate bond market rather than bank borrowings. However, their low credit ratings could make it difficult for them to raise funds through bonds.

On August 25, the RBI issued rules that will place restrictions on the amount large Indian borrowers can raise from banks in future, which, in turn, will push them to raise debt through corporate bonds instead. The norms will be implemented over three years.

Starting next financial year, some companies will be classified as “specified borrowers”.

1. In the first year, specified borrowers will be those that have total bank loans of over Rs 25,000 crore.
2. The threshold will fall to Rs 15,000 crore in 2018-19.
3. It will settle at Rs 10,000 crore in 2019-20.

As of now, there are around 56 Indian companies that have total bank loans of more than Rs 10,000 crore, as per data compiled by research firm Ace Equity from company filings as on March 31, 2015.

Ratings agency CRISIL believes that over the next three years, this number could rise to between 80 and 100, as several companies have total bank loans of between Rs 6,000-7,000 crore.

Once a company is assigned the tag of “specified borrower”, they can raise 50 percent of incremental borrowings as fresh bank credit. The remaining 50 percent should be raised via the debt markets. Should they continue to borrow more than 50 percent from banks, this borrowing will attract higher risk weights and provisions. Both India Ratings and CRISIL Ratings have estimated that in such situations borrowing costs will go up by around 150 basis points. A basis point is 0.01 percent.

Vemuri pointed out that if a company is unable to raise funds in the corporate bond market because the interest rates being quoted are too high, it would indicate to banks that the risk weights for the borrower need to be higher.

Where Do The Ratings Stand?

Ratings agencies CRISIL Rating and India Ratings & Research consider “BBB-” as the outer rating limt for debt instruments that are considered investment grade. For these two agencies, ratings range from “AAA”, which is the highest rating and which indicates that there is little or no chance of a default, to “D”, where a borrower has defaulted on a repayment.

Of the 56 companies that have total bank loans of more than Rs 10,000 crore each,11 companies fall below the investment grade and seven are presently rated “D”.

An added complication for lower rated borrowers could be regulatory restrictions on investments by insurance and pension funds, who are major investors in corporate bonds. Insurance companies and pension funds are regulatorily required to invest mostly in paper rated “AA” or above.

Of the 53 rated companies in the list, only 18 companies are rated “AA” or above. Does this mean that corporate bonds issued by the rest will not find takers? Not necessarily, said Vemuri.

Can Lower Rated Borrowers Issue Corporate Bonds?

According to Vemuri, companies that have a credit rating of “AA-” and even some that have a rating of “A” can tap the external commercial borrowing market and raise funds overseas.

Also, the RBI’s decision to allow banks to provide partial credit enhancement of up to 50 percent of the issue size of a corporate bond compared to 20 percent earlier, will help lower rated companies tap the market. A partial credit enhancement effectively raises the credit rating of a corporate bond.

The extent of the increase in the credit rating would depend on the original rating of the bond and on the cash flows of the company, said Vemuri.

The Immediate Impact

As many as 25 out of the 56 companies in the list had total bank credit of over Rs 25,000 crore as on March 2015. If their debt has not reduced significantly, which is unlikely, these companies will be tagged as specified borrowers from April 1 next year. Out of these 25 companies, five bear a credit rating of “D”.

Of the others, one is rated “BB”, another is rated “BB-” and one is not rated.

“It is a difficult proposition for a lot of these stressed corporates, in that, they’ll find it hard to raise fresh lines of credit,”said Bhattacharya. “These companies will get a breather of sorts through the debt restructuring schemes that are in place as they will get access to working capital if they qualify.”

Bhattacharya also feels that some companies may be able to rely on higher ratings of the promoter group to access the debt markets.

“The intent of the RBI seems to be not just better pricing of debt by the banking system but also to ensure better credit monitoring going forward. The biggest learning from the ballooning non performing assets is that while banks turned a blind eye when some covenants were breached by corporates, the bond market was much more proactive in reacting when there was an instance of a default,” said Bhattacharya.