Corporates fight off default mode
Even supposed blue-chip companies, such as Mexico’s Cemex, India’s Tata Steel and Russia’s Rusal, face big refinancing risks this year. All three have been caught out by the credit crunch and are under pressure to finance expensive acquisitions.
Cemex, for example, is struggling to keep its debt burden under control following its $14 billion acquisition of Australian firm Rinker in 2007. Although Cemex refinanced about $4 billion of debt due this year in late January, it still faces $2 billion in maturities. The company recently announced a net loss of $707 million in the fourth quarter with operating profit down 35% from a year ago. Net debt at the end of December was four times 12-months ebitda, at $18 million.
Tata Steel too is struggling after paying over the odds for the UK’s Corus in 2007, which it acquired for $12 billion. Morgan Stanley reckons that Corus’s debt covenants may be under pressure soon, according to a report in India’s Business Standard. Indeed the entire Tata group is coming under scrutiny after buying equity stakes of 21% or more in 53 countries since 2000, making it especially vulnerable to the global downturn.
Rusal, meanwhile, plans to agree to a debt restructuring with its lenders within the next two months. The company has about $14 billion in debt. This includes a $4.5 billion loan that it took on from state bank VEB last year to refinance debt for its acquisition of a 25% plus one-share stake in Norilsk Nickel.
The chances are that all three companies will struggle through and come to an agreement with their lenders. Philip Poole, global head of emerging markets research at HSBC, reckons that generally a high proportion of bank loans will get rolled over just to keep the debt current. “One can assume that loans will get rolled over because it’s better for banks to keep them performing than risk more NPLs,” he says.
Of course, some defaults will be inevitable. In Kuwait, for example, the country’s biggest investment firm, Global Investment House, defaulted on most of its $3 billion in debt in January. Other high-profile casualties can be expected to follow.
