Thursday, March 18, 2010

>Do Asian countries still have a risky debt structure? (NATIXIS)

We propose in this study to analyze the debt structure trends of the institutional sectors of six emerging economies in Asia and the risks related to them.

The large proportion of contracted external debt (regardless of the institutional sector) had in fact been identified as one of the main sources of external vulnerability of these economies at the time of the Asian crisis in 1997.

We shall show that in the 2000s the debt structure balanced gradually towards more stable and less risky domestic debt due primarily to the reduced exposure to foreign exchange risk. However, there are still persistent signs of financial vulnerability. First for certain countries, the balance has not been restored in all institutional sectors (public sector and non financial private sector in the Philippines; non financial private sector in Indonesia), second, new financial vulnerabilities have appeared as attested by the high debt levels (particularly concerning the non financial private sector in South Korea), which raises the issue of their medium term sustainability.

We propose in the context of this study to analyze the debt structure of six emerging economies in Asia (South Korea, India, Indonesia, Malaysia, Philippines and Thailand) by adopting both a time-factor and transversal viewpoint.

We were particularly interested in the debt of three institutional sectors: the government sector, the banking sector and the non financial private sector (households and corporate) over a period starting from the middle of the 1990s (pre-Asian crisis) to today.

The findings of this study can be summarized in three main points:

- Public sector:
• On the domestic level, India seems to show relative vulnerability linked to the long-term sustainability of public debt. This sustainability could be reassessed if the budget deficit were to worsen,

• On the external level, only the Filipino public sector seems to be relatively vulnerable due to the volatility of capital flows and the foreign exchange rate, caused by the non negligible proportion of external liabilities contracted with foreign private creditors. The other economies present no particular vulnerability linked to the public debt structure.

- Banking sector:
• On one hand, this sector’s proportion of external liabilities fell for all countries over the study period and on the other hand, the economies of the zone no longer have since the beginning of the 2000s, external currency mismatches on the balance sheet of these sectors. As a result, the economies of the sample present no specific vulnerability linked to the external debt structure of the banking sector.

- Non-financial private sector:
• On the domestic level, South Korea presents relative vulnerability with respect to the heavy debt burden of households and corporate which exposes them in the short-term to a greater sensibility of their net worth to an interest rate or income shock. Against a background of relatively limp global recovery, the high debt level strains also the potential of economic recovery given the limited possibilities of using debt to leverage growth. In the long term, there is also the issue of the sustainability of corporate debt and the solvency of this sector for which an adjustment would entail reduced investment.

• On the external level, Indonesia and the Philippines seem to be the economies that require watching due first to the non negligible proportion of externally-contracted liabilities, although these have been on a downward trend since 2001 (especially in Indonesia). A depreciation of the national currency would threaten the solvency of these sectors by increasing the burden of the liabilities owed.

To read the full report: DEBT STRUCTURE


■ Good times may not last long for a few industries.

■ Returns of Indian companies have been very high historically

■ Historically favorable factors may be less supportive in future

■ Automobiles, cement and gas transportation may be the worst impacted

■ Demise can be swift and unexpected, telecom experience can repeat almost anywhere.

To read the full report: INDIA STRATEGY


Everything you wanted to know about RIL…

RIL – India’s largest company
■ India’s largest company - $70 bn market cap
■ 12% of NIFTY, MSCI India; 13% of SENSEX
■ Daily trading volumes - $190mn

Key business segments
■ Refining – largest single location refinery complex in the world
■ Petrochemicals – local dominance, pursuing global opportunities
■ E&P – Changing earnings mix; driving earnings, valuations

"Starting with textiles in the 1970s, RIL grew through a series of massive projects in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil & gas E&P. It is a fully integrated player in materials and the energy value chain. The company has ventured into organized retail and infrastructure development (SEZs) and pursuing inorganic growth opportunities in energy, chemicals.

"In 2005, as part of the family settlement, RIL underwent substantial restructuring. Dhirubhai
Ambani’s elder son, Mukesh Ambani, retained control of RIL with the core petrochemical, refining and E&P businesses. The younger son, Anil Ambani, got control of the telecom, power utility and financial services businesses

"Key strengths: Excellent project execution; managing the environment

To read the full report: RIL

>Indian Infrastructure Outlook 2010 (FITCH RATINGS)

Fitch Ratings has a stable outlook for 2010 on its portfolio of rated infrastructure project debt; this represents an array of project asset classes, including roads, airport, power, water and rail. The ratings, especially for projects under construction, are at low levels. Construction delays continue to be a major irritant, with a number of factors outside the control of project sponsors (including land acquisition and regulatory approvals) negatively impacting timely completion.

In the absence of rigorous adherence to contractual provisions, project companies and sponsors have had to take on the burden of additional costs, either through the drawdown of available cash, the raising of equity, or the issuance of debt. Governmental concession‐granting authorities have also seemed willing to extend the schedule for project delivery. Banks, recognising these systemic constraints, and responding to the requests of project companies and concession‐granting authorities, seem willing to reschedule project loans, chiefly by postponing commencement of principal moratorium. This spirit of accommodation/adjustment‐ or ‘jugaad’ ‐ adopted by various project counterparties (including sponsors, bankers, contractors and the government) has prevented large‐scale rating downgrades. Nevertheless, the capacity for ‘jugaad’ is limited and in certain cases, projects remain vulnerable to specific event risks; as such, there could be selective ratings downgrades in 2010.

Fitch‐rated operating projects appear to have weathered the economic slow down without deterioration in credit profiles (beyond the initial stress scenarios). The pick‐up in user demand and revenue growth rates witnessed in recent months has contributed to Fitch’s stable outlook. The economic crisis dampened usage growth rates in the transportation sector, and some projects are struggling to achieve base case forecasts, but other operating projects are displaying resilience. Consequently, there may be select ratings upgrades for the Fitch‐rated debt of certain operating projects. Outside of Fitch’s rated universe, the agency has a largely stable outlook on the Indian infrastructure sector as a whole; this stems from the recovery following the economic slowdown witnessed in the second half in FY09. This recovery has been aided primarily by three factors: (a) renewed urgency displayed by the government to bid out new projects; (b) demand pick‐up on the back of higher GDP growth rates; and (c) favourable financial environment, including a buoyant equity market and banks awash with liquidity. All of these factors have contributed to a return of an appetite for risk on the part of the private sector.

Although achieving financial closure for greenfield projects has become a lot easier and quicker ‐ due to abundant bank liquidity in a favourable economic environment ‐ projects continue to be burdened with high interest rates, heavy gearing and medium‐term amortising loan tenors; all of which contribute to high risk profiles for such projects.

Project developers appear to be pricing some of the risk elements of past projects into their bids and return expectations for new road projects; this is a consequence of the National Highways Authority of India’ s (NHAI) inability to complete timely right of way (RoW) acquisitions or to permit partial tolling. Developers are also seeking to employ creative methods of overcoming public counterparty delays, including financing higher ROW upfront purchase prices and then filing for a concession extension after project delivery (COD).

To read the full report: INDIAN INFRASTRUCTURE


Sailing in choppy water…

• The Baltic Dry Index (BDI) declined by 4% to 2738 level in February 2010 as against 2848 in January 2010. The decline was led by a 9% fall in the Capesize vessel index, which declined to the 3174 level

• Tanker rates corrected in February 2010 after rising for three successive months. The Dirty Tanker Index declined by 17% to 897 while the Clean Tanker Index declined by 14% to 762

• LPG freight remained flat in February 2010 except for a small decline in large sized gas carrier rates

• Utilisation level for drillship, jack-up rigs and semisubs were at 91%, 81% & 86%, respectively in February 2010

• New build asset prices showed negligible price movement. Five year old asset prices for tankers remained weak with maximum correction in Suezmax rates by 2% and MR Tanker rates by 6%. Dry bulk vessel rates firmed up marginally with a 2% rise in Capesize vessel rates

• New building orders for dry bulkers decreased from 42 to 35 vessels while that for tankers increased from 12 to 18 vessels in February 2010

• Demolition of vessels continued to be strong in February 2010 with demolition of 67 vessels. India acquired the most vessels for demolitions (35) with an average scrap price of $276 per LDT in India with global average scrap prices at $355 per LDT.

To read the full report: FREIGHT FORWARD