Beware of Corporate Debt Risks

Alchemist

Administrator
Staff member
#1
The recent defaults by corporates like IL&FS, DHFL, RHFL etc have shocked the Indian debt market.

Low interest rates in the west have created a gigantic bubble in the debt markets - not just in India but everywhere around the world. Poor quality companies and companies with questionable practices have been able to borrow money at abnormally low rates.

With a global economic slowdown around the corner, corporate defaults are rising.

My fear is that the worst is yet to come.

The report revealed that about 40% of India’s corporate debts are with firms that are unable to even earn enough to pay the interest costs.
The Credit Suisse report further says that out of the $ 530 billion total debt, almost two-thirds of it is with firms that have not covered interest payments for at least 11 of the past 12 quarters. About 30% of the total debt is with firms that have reported losses.
Although Wall street bond experts would like to make us believe that the issue would be contained in the next one year, at maximum, the financial indicators are not that reassuring. According to Securities Industry and Financial Markets Association data, the total US corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent. No one wonder that a section of commentators and analysts consider this as a time bomb ticking.
http://www.cadtm.org/Corporate-debt-the-catalyst-for-the-next-crisis-in-India

Trump is constantly pressurizing the Fed to lower interest rates. However, that will only inflate the bubbles in the global economy and the consequences can be disastrous.

As mentioned earlier, I have stopped investing in NCDs/bonds of private companies and decided to stick to deposits of banks only.
 
#2
Any opinion regarding SREI? As I have around 30-40% of my holding in DHFL and 50-60% in SREI bonds. So approx 90% of my investment is in both these companies.
 
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Alchemist

Administrator
Staff member
#3
Any opinion regarding SREI? As I have around 30-40% of my holding in DHFL and 50-60% in SREI bonds. So approx 90% of my investment is in both these companies.
SREI's stock and bonds have been battered in the last few months and it seems the market is quite pessimistic about its future.

Even though the company has been hit by the NBFC crisis, there is nothing in the public domain that justifies such pessimism.

There was a whistle blower complaint a few months back but nothing really came out of it.

Kolkata-based SREI Equipment Finance Limited has come under the scanner of various agencies after a whistleblower's letter alleged that the financing firm had restructured loans to prevent them from becoming non-performing assets (NPAs).
https://www.moneycontrol.com/news/b...-by-srei-company-refutes-charges-3666881.html

They are facing some difficultly in raising new funds, but that is a problem common to many NBFCs.

Is there any difficulty in accessing funds from the markets?

Absolutely, in getting new resources for funding. We did not have a problem of solvency or the mismatch of ALM because our asset-liabilities were fairly well matched and so that is not a problem. But the problem is to get new funding to allow the growth on book and that is of course getting impacted. You hardly have any new source of money available. Whatever little is happening is via support from international institutions. We have to manage this environment. Our aim should be to review our business models as we go along.
https://economictimes.indiatimes.co...a-srei-infra-finance/articleshow/70042577.cms

Which bonds do you hold?

Are they maturing in next 1-2 years or are long-term NCDs?
 

Alchemist

Administrator
Staff member
#4
For a few years, India's consumer demand has substituted the lack of investments in the economy.

However, now even consumption side of economy is facing headwinds.

The strongest of Indian consumer companies have warned of slowing demand this year.

India’s biggest consumer finance company and its biggest retail jewellery and fashion firm have both warned of tough conditions in the first quarter ended June ratcheting up the pressure on New Delhi and the Reserve Bank of India to do more to stoke demand.
https://economictimes.indiatimes.co...spending-takes-a-hit/articleshow/70136344.cms

Consumer defaults have also started to rise.

After blindly chasing individuals comforted by their regular income, the spectre of joblessness looms as companies such as Jet, RCom and Alok Industries undergo bankruptcy and the last bastion of banking – retail lending – is facing its worst crisis in a decade.
https://economictimes.indiatimes.co...ing-for-indian-banks/articleshow/70458734.cms

I am expecting next few quarters to be very tough - both from financial and economic point of view.
 

Alchemist

Administrator
Staff member
#6
I am holding SREIINFRA-Y9 and maturing in Feb 2022. Although NSE and BSE last traded price is now better but this seems one off trade. It is even difficult to sell at 840-850
No volume on Friday - no liquidity at all.

With each passing week, more and more companies are either defaulting or reporting fresh debt problems.

Fresh problems were reported in case of Talwarkars, Cox and Kings, Cafe Coffee Day, Yes Bank (HDIL case), Lodha Developers etc in last 7-10 days.

I am unsure how banks, especially PSU banks are going to handle this fast deteriorating situation in the debt markets. Even secured debt is becoming a problem as either the underlying security is over-valued or there is a lack of buyers in the market for assets or the resolution process is taking too long.
 

Alchemist

Administrator
Staff member
#8
@Alchemist Do you have more details on the YES Bank (HDIL Case) that you are referring to?
A foreign investor in the Indian property market has alleged in a complaint to Reserve Bank of India (RBI) that Yes Bank and realty group HDIL have moved funds to evergreen loans.
https://economictimes.indiatimes.co...st-hdil-and-yes-bank/articleshow/70490836.cms

Even earlier I had expressed my doubts about how Yes Bank managed to keep NPAs at such low levels in spite of having significant exposure to MSMEs.

It is possible that the above accusation is true and Yes Bank is involved in other similar cases.
 

Alchemist

Administrator
Staff member
#9
It seems the situation isn't much better in many other Asian economies.

The analysis looked at the share of long-term debt held by corporations with an interest coverage ratio of less than 1.5 times. At these levels, corporations are using a predominant share of their earnings to repay their debt, according to the study. In 2017, in China, India and Indonesia, more than 25% of long-term debt was held by companies with a ratio of less than 1.5, it said.
McKinsey has warned for another Asian Debt Crisis.

https://www.livemint.com/market/sto...on-the-cards-says-mckinsey-1566286324351.html
 
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