InvestorQ : How are renewable energy companies faring amidst falling rupee, since they have borrowed the most dollar loans in recent years?
Arti Chavan made post

How are renewable energy companies faring amidst falling rupee, since they have borrowed the most dollar loans in recent years?

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Rutuja Nigam answered.
2 months ago
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The fact is that these renewable energy companies have been the borrowers in dollar debt in recent years. However, there is not much of a worry as we shall see here. When the rupee fell from Rs73/$ to Rs80/$, the RBI had warned that the average Indian dollar borrowings were only hedged up to of 50%. This is against the ideal hedging ratio of 6%, which raised a major exposure risk. After all, the rising dollar did make the dollar borrowings more expensive and renewable energy companies were the most vulnerable.

Initially, there were concerns that the renewable energy companies may get into the dollar trap due to their exposure to dollar loans. However, the reality is that most renewable companies are in a fairly comfortable situation with respect to their dollar exposures. There is no risk of dollar trap and here is why. Firstly, most of these companies have adopted smart hedging strategies based on immediacy of outflows. This allowed them to reduce the pressure of short term volatility in the dollar on their solvency.

It must also be remembered that there has been a consistent improvement in underlying credit profile of renewable companies in India over the last few years. That has reduced their cost of borrowings and made them less vulnerable to dollar costs. The third factor is that most such loans are backed by parent company guarantees. This limits the impact of rupee depreciation on credit ratings of Indian renewable energy companies. Since downgrades are not such a risk, risk of rupee fall is not so much on them.

Some interest details have been put out by Fitch, the global rating agency which rates such dollar bonds. According to Fitch, out of 11 such renewable energy issuances rated with total dollar bond value of $5 billion, 8 of these companies had fully hedged coupon payments with the first bullet or principal repayment is only due by mid-2024. That is a lot of time for the dollar to stabilize. Unless it is a black swan event, there not much to worry. Yes, the downside risk is uncapped beyond a certain point, but that is more theoretical possibility.

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