Cos, deluged with debts, face hard time navigating rising interest

Mohammad Mufazzal | Published: January 20, 2024 21:16:56

The biggest challenge of highly leveraged companies now is to tackle their burgeoning interest payment following the persistent policy rate hikes.
Ensuring profitability will depend on how prudent their management will be in keeping costs in check while bearing a higher cost of finances; the recent rise in policy rate will be translated into higher interest rates on credits.
Advanced Chemical Industries (ACI) is one among the highly-leveraged companies listed on the stock exchanges.
According to the company's financial statement for FY23, its consolidated debts amounted to more than Tk 62 billion, including long-term bank liabilities.
Western Marine Shipyard, Premier Cement Mills, IFAD Autos, Baraka Power, GHP Ispat, and Envoy Textiles also have a huge debt burden that squeezes their profit margin.
"The companies [with high volumes of debts] were in a comfortable situation during the period of the lending rate cap [at 9 per cent]," said Tanay Kumar Roy, head of equity research at IDLC Securities.
Now, how well they will navigate the environment of rising interest rates will depend upon their management efficiency, sizes of profits, and debts, he added.
Banks' lending rate is changing with the six-month moving average rate of Treasury bills (SMART) plus an interest margin.
The rate of six-month Treasury bills jumped from 7.35 per cent to 11.09 per cent between July and December last year as the policy rate rose from 6.50 per cent to 7.75 per cent.
The repo rate, at which the central bank lends money to commercial banks, has been increased by 25 basis points to 8 per cent for January-June this year.
As the yields of T-bills will rise, other interest rates will rise as well.
The steep increase in interest rates will eat up a bigger chunk of the income of the leveraged companies.
For example, if a company has an interest bearing loan of Tk 1 billion received at a 5 per cent annual interest rate, it will have to make a yearly repayment of Tk 50 million.
Following 100 basis points (bps) or 1 percentage point jump in the interest rate, the company will have to repay Tk 60 million. That amount will be deducted from the profit.
Taking into account a 100 bps increase in the interest rate, IDLC Securities says the ACI will face the highest negative impact of interest bearing loans on earnings.
Companies with high income will offset the debt burden comfortably to some extent, compared to those with low income.
Let's assume that two companies -- X and Y -- have debts worth Tk 5 billion each. Each of them is required to pay an interest of Tk 250 million per year at a rate of 5 per cent. If X earns Tk 500 million and Y sees an income of Tk 400 million, the former will enjoy a higher net profit, considering that they bear the same amount of debt.
"Companies with higher profits will be in a better situation but the challenge is there," Mr Roy said.
Preferring anonymity, a senior official of the ACI said all leveraged companies had already started seeing their interest burden get heavier.
The company will try to adopt an efficient policy to bear the extra burden of repayment, he said, adding that higher interest rates would likely have an impact on the product prices of highly-leveraged companies.
However, given the already high inflation and high commodity prices, companies will be at risk of losing competitiveness with peers if they hike product prices further.
mufazzal.fe@gmail.com