Foreign Debt Denominated in US Currency

The US has a highly developed corporate debt market. Many large companies issue bonds rather than turning to banks or issuing shares (which dilutes other shareholders, and requires more profits to reach the same EPS), and there are tax advantages, as well.

Other countries are trying to emulate the US and issue debt. However, many buyers of debt in the US do not want the “risk” and hassle of debt denominated in foreign currencies (such as the Indian Rupee). As a result, these companies issue “dollar denominated debt”, which are then used to fund local country operations. US investors will often buy this debt because it seems to not have any currency risk per-se and they offer higher rates than US companies of comparable credit ratings.

However, I noted that this lack of “currency risk” was a mirage, since the issuing company in India still faced the impact of currency changes when they had to convert their local currency into dollars for the interest and principal repayments. The US investors purchasing the debt don’t see these day to day fluctuations, but they cause significant downside risk (if the issuing currency depreciates) without a corresponding upside alternative (if their currency appreciates vs. the US dollar, there is no windfall for the debt buyer, that all goes to the issuing firm).

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Prepare to see a lot of trouble as the Indian rupee continues its significant decline vs. the US dollar. Unless the local companies hedged the entire issuance indefinitely (which likely most didn’t and even if they hedged some of it future hedge renewals will be ruinously expensive), they now are effectively paying back a lot more than just the original principal amount to the buyer. The likeliest outcome is a much higher rate of default (or concessions on the part of the buyer) for these loans as the principal becomes due.

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