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Business trends

Currency rout hits emerging Asia's companies

Indonesia and India find themselves carrying heavy dollar burdens

Indonesian property developers stand to lose more from currency depreciation    © Reuters

JAKARTA/MUMBAI -- Asian currencies have taken a beating in 2018 from rising U.S. interest rates and investors' growing wariness of emerging market assets. This week both the Indian rupee and Indonesian rupiah hit fresh lows against the U.S. dollar, digging a big hole for Asian companies that have heavy dollar-denominated debt.

In India, the rupee has been Asia's worst performing currency this year, depreciating as much as 13.9% against the greenback. On Thursday, it fell to an all-time low of 74.48 to the dollar during trading.

Even before the currency began to plummet, corporate India was rocked by a high-profile default. Last November, cellphone service provider Reliance Communications, controlled by billionaire Anil Ambani, missed an interest payment on a $300 million debt.

Now concerns may be rising that others could be coming under pressure as the rupee continues its slide. Sectors such as aviation, which have costs such as fuel denominated in dollars, but which earn revenues in rupees, are more heavily exposed, analysts say.

"Airlines is a debt heavy sector where the impact on margins would be moderate to high whereas impact on credit quality would be moderate and hence needs to be monitored," saidCrisil, a ratings, research and risk-assessment company.

Indian companies have increased their exposure to foreign denominated debt -- especially in dollars -- in recent years. Thanks to the interest rate differential between India and other markets, borrowing dollars has been cheaper than taking out rupee loans.

Data compiled by Crisil shows that Indian companies' external commercial borrowings stood at $196.9 billion in March 2018, up nearly 14% compared to a year earlier. According to Dealogic, Indian corporates have $32 billion in dollar debt that began maturing on Friday, and which falls due through 2020.

Moody's, the credit ratings agency, said in a note last month that "a sustained weakening of the rupee would be credit negative for its rated Indian companies."

However it believes that this elite group of companies is not yet in danger. "Most rated Indian-based corporates have protections in place -- including natural hedges, some U.S. dollar revenues and financial hedges -- to limit the negative credit implications of a potential further 10% weakening of the rupee to the U.S. dollar from Thursday's rate," said Annalisa DiChiara, a Moody's vice president and senior credit officer.

Companies in the oil, gas and power sectors have the most exposure to foreign currency loans. These two sectors account for about 61% of all foreign currency loans, followed by the telecom, airline, pharmaceutical, automotive and aluminum sectors. Not all generate the same levels of concern, however.

"For debt heavy sectors such as Oil & gas, Power, [and] Telecom, moderate hedging levels, pricing mechanism or support from parents leads to a low impact on the credit profile [from rupee depreciation]," Crisil said in a note.

Experts reckon that rising interest rates in the U.S. will make it more difficult for Indian corporations to raise money in dollars. This could be a concern, analysts say, given that local Indian banks are handicapped by an estimated 10 trillion rupees ($135.87 billion) in bad loans, and have become selective in doling out additional credit.

Perhaps in a bid to avoid the dollar pinch, Indian companies are turning to other currencies. According to a report by Bloomberg, Power Grid and Indian Railway Finance are seeking Samurai loans that would add to the $846 million worth of syndicated yen loans raised by corporate India this year.

In Indonesia, the rupiah's downward spiral has exposed vulnerabilities in property developers Lippo Karawaci and Alam Sutera, as well as holding company MNC Investama and tire maker Gajah Tunggal. 

"Most of their debt is denominated in dollars," ratings agency Moody's said in a note, "while their cash flow is in rupiah." 

The two property developers stand to lose more from currency depreciation "as their hedges do not provide protection above 15,000 rupiah to the dollar," Moody's said, adding that neither has "sufficient dollar cash on its balance sheet to cover annual interest expenses."

Despite interest rate hikes by Bank Indonesia, the country's central bank, and government measures to ease downward pressure on the currency, the rupiah this year has fallen as much as 11% against the dollar. On Thursday it marked 15,265, close to its weakest point against the greenback since the 1998 Asian financial crisis.

Data from Quick FactSet shows Lippo Karawaci has just over $1 billion in outstanding dollar-denominated debt. In mid-September, Moody's downgraded its credit rating to a highly speculative, noninvestment-grade B3 and assigned it a negative outlook.

Lippo's share price has dropped 35% this year, while Alam Sutera's has shed 20.7%. The Jakarta Composite Index has dropped by 9.4%.

Alam Sutera has dollar debt of $482 million.

State-owned utility Perusahaan Listrik Negara also has a sizable dollar debt -- and mostly rupiah revenue. But Moody's said that "in case of need, we would expect Indonesia's government to support PLN, via either an increase in subsidies or a capital injection."

A total of $18.5 billion in dollar debt held by Indonesian companies excluding financials will reach maturity from Friday through 2020, data from Dealogic shows.

Under Bank Indonesia rules, companies are required to hedge a minimum 25% of their foreign currency denominated liabilities due in three to six months' time.

"We keep monitoring our corporates' ability to pay [debts] -- be those publicly listed or not," said Erwin Rijanto, deputy governor at Bank Indonesia. "Companies like coal and mineral miners source more of their financing from foreign debts... For the coal sector, their current levels of debt to service ratio, interest coverage ratio and debt at risk are still far above the dangerous limits. So their [debt payment] ability is still good."

In the Philippines, the peso this year has fallen as much as 8% against the greenback. Some companies that took on foreign-currency debt while aggressively expanding in recent years are now refinancing.

San Miguel, which has diversified from food and beverages into power and infrastructure, in May issued 20 billion pesos worth of fixed-rate notes to refinance dollar-denominated debt. The country's largest company by sales has substantial dollar debt compared with other Philippine conglomerates. If history is any indication, the weak peso will erode San Miguel's earnings.

Food and beverage company Universal Robina is planning to refinance debt of around 420 million New Zealand dollars ($272 million) incurred in 2014, when it acquired Griffin's Foods of New Zealand, according to reports in late September.

But for some companies, the weakening peso, which is hovering close to a 13-year low, is a blessing.

The $24 billion outsourcing industry, dominated by American call center companies, usually rejoices when the peso suffers. The industry, which earns in dollars, becomes more cost competitive and enjoys fatter margins when the greenback strengthens, industry officials have said.

Nikkei staff writer Cliff Venzon in Manila contributed to this article.

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