an asset that necessarily takes a substantial period of time to get ready for its intended use or sale<\/em>.\u201d<\/p>\nWhat this tells us is that the real interest coverage ratios of these business groups are worse than they seem.<\/p>\n
d) <\/strong>Given that the interest coverage ratios of these firms are in such a mess, it is not surprising that they are already defaulting on their debts. As the Credit Suisse analysts point out: \u201cRating agencies have now assigned the default “D” rating to ~5-65% of debt for these groups. For Jaypee Group, almost two-thirds of the group debt is now in the default category including standalone parent company debt. Other groups have also seen multiple defaults at the SPV level for power and road projects<\/em>.\u201d (As can be seen from the accompanying table)<\/p>\n\n\n\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n In fact, the auditors have also highlighted these defaults in the annual reports of these companies. As the Credit Suisse analysts point out: \u201cAccording to their auditors report, eight of the ten ‘House of Debt’ groups were in default last year. Total debt with these companies in default was at US$53 bn (~48% of total debt with the groups) of which US$37 bn were reported to be in default for 0-90 days by the auditors<\/em>.\u201d These are not small numbers by any stretch of imagination.<\/p>\ne) <\/strong>Over the last few years, the business groups have tried to repair their balance sheets by selling assets in order to repay their debts. This hasn\u2019t helped much given that in certain cases, the assets that they have had to sell, essentially brought in the money.<\/p>\nTake the case of Jaypee Group. The group has sold assets and these sales are expected to \u00a0\u00a0bring in Rs 22,000 crore. The trouble is that these assets contributed 59% of its operating profit (earnings before interest and taxes) during 2014-2015.<\/p>\n Further, \u201ca large number of projects especially from power and road sectors have seen delays in completion which has led to cost overruns. Some of the projects now have reported cost overruns of 20-70%.<\/em>\u201d<\/p>\nWhat makes the situation trickier is the fact that \u201csome of the companies have 5-50% of long-term debt (~US$15 bn) maturing within the next year and would need refinancing. Also, 5-37% of their debt is short term (~US$20 bn) that needs to be rolled over<\/em>.\u201d \n \n<\/strong>What this tells us very clearly that all this talk about general corporate revival needs to be taken with a pinch of salt. A major section of the corporates the infrastructure sector continues to battle the high debt that they had taken on during the go-go years between 2004 and 2011 and are now not in a position to even pay interest on this debt.<\/p>\nAlso, it is worth mentioning here that owners of a bankrupt company have no real incentive in acting in the best interests of the company. This is a point that Nobel Prize winning economists George Akerlof and Robert Shiller make in their book Phishing for Phools \u2013 The Economics of Manipulation and Deception.<\/em><\/p>\nAs they write: \u201cIf the owners of a solvent firm pay themselves a dollar out of the firm, they diminish the amount they can distribute to themselves tomorrow by that dollar plus its earnings<\/em>.\u201d Hence, owners of a solvent firm have some incentive to not take out money from it. But that is not the case with the owners of an insolvent or a bankrupt firm.<\/p>\nAs the economists write: \u201cIn contrast, if the owners of a bankrupt firm take an extra dollar out of their firm, they will sacrifice literally nothing tomorrow<\/em>.\u201d<\/p>\nAnd why is that? \u201cBecause the bankrupt firm is already exhausting all of its assets, paying all those Peters and Pauls <\/em>[read banks in the Indian case]. Since there will be nothing left over for the owners, they have the same economic incentives as Genghis Khan\u2019s army, as it marched across Asia: what they do not take today, they will never see tomorrow. Their incentive is to loot<\/em>.\u201d<\/p>\nLook at what happened to the banks in case of Vijay Mallya and all the money he had borrowed. This also explains why many Indian firms become sick but no Indian industrialist ever becomes bankrupt.<\/p>\n Long story short \u2013 banks will continue to have a tough time ahead.<\/p>\n The column originally appeared on The Daily Reckoning<\/a> on Oct 27, 2015<\/p>\n","protected":false},"excerpt":{"rendered":"Over the last few years, Credit Suisse has brought out an interesting series of reports titled the \u201cHouse of Debt\u201d. The latest version of the report was released last week. The report tracks the total debt of 10 Indian business groups which have taken on around 12% of total loans of the Indian banking system. … <\/p>\n Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[423,834,1417,1773,3123],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Equitymaster<\/a>","qubely_excerpt":"Over the last few years, Credit Suisse has brought out an interesting series of reports titled the \u201cHouse of Debt\u201d. The latest version of the report was released last week. The report tracks the total debt of 10 Indian business groups which have taken on around 12% of total loans of the Indian banking system.…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3906"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=3906"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3906\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=3906"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=3906"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=3906"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}} |