Tag: debt

US national debt hits record $34 trillion as Congress gears up for funding fight

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

The federal government’s gross national debt has surpassed $34 trillion, a record high that foreshadows the coming political and economic challenges to improve America’s balance sheet in the coming years.

The US Treasury Department issued a report Tuesday logging US finances, which have become a source of tension in a politically divided Washington that could possibly see parts of the government shutdown without an annual budget in place.

Republican lawmakers and the White House agreed last June to temporarily lift the nation’s debt limit, staving off the risk of what would be a historic default. That agreement lasts until January 2025. Here are some answers to questions about the new record national debt.

The national debt eclipsed $34 trillion several years sooner than pre-pandemic projections. The Congressional Budget Office’s January 2020 projections had gross federal debt eclipsing $34 trillion in fiscal year 2029.

But the debt grew faster than expected because of a multi-year pandemic starting in 2020 that shut down much of the US economy. The government borrowed heavily under then President Donald Trump and current President Joe Biden to stabilise the economy and support a recovery. But the rebound came with a surge of inflation that pushed up interest rates and made it more expensive for the government to service its debts.

“So far, Washington has been spending money as if we had unlimited resources,” said Sung Won Sohn, an economics professor at Loyola Marymount University. “But the bottom line is there is no free lunch,” he said, “and I think the outlook is pretty grim.”

The gross debt includes money that the government owes itself, so most policymakers rely on the total debt held by the public in assessing the government’s finances. This lower figure — $26.9 trillion — is roughly equal in size to the U.S. gross domestic product.

Last June, the Congressional Budget Office estimated in its 30-year outlook that publicly held debt will be equal to a record 181% of American economic activity by 2053.

The national debt does not appear to be a weight on the US economy right now, as investors are willing to lend the federal government money. This lending allows the government to keep spending on programs without having to raise taxes.

But the debt’s path in the decades to come might put at risk national security and major programs, including Social Security and Medicare, which have become the most prominent drivers of forecasted government spending over the next few decades. Government dysfunction, such as another debt limit showdown, could also be a financial risk if investors worry about lawmakers’ willingness to repay the US debt.

Foreign buyers of US debt — like China, Japan, South Korea and European nations — have already cut down on their holdings of Treasury notes.

A Peterson Foundation analysis states that foreign holdings of US debt peaked at 49 percent in 2011, but dropped to 30% by the end of 2022.

“Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March,” said Peterson Foundation CEO Michael Peterson. “Adding trillion after trillion in debt, year after year, should be a flashing red warning sign to any policymaker who cares about the future of our country.

The debt equates to about $100,000 per person in the US. That sounds like a lot, but the sum so far has not appeared to threaten US economic growth.

Instead, the risk is long term if the debt keeps rising to uncharted levels. Sohn said a higher debt load could put upward pressure on inflation and cause interest rates to remain elevated, which could also increase the cost of repaying the national debt.

And as the debt challenge evolves over time, choices may become more severe as the costs of Social Security, Medicare and Medicaid increasingly outstrip tax revenues.

When it could turn into a more dire situation, is anyone’s guess, says Shai Akabas, director of economic policy at the Bipartisan Policy Center, “but if and when that happens, it could mean very significant consequences that occur very quickly.”

“It could mean spikes in interest rates, it could mean a recession that leads to lots more unemployment. It could lead to another bout of inflation or weird going on with consumer prices —several of which are things that we’ve experienced just in the past few years,” he said.

Both Democrats and Republicans have called for debt reduction, but they disagree on the appropriate means of doing so.

The Biden administration has been pushing for tax hikes on the wealthy and corporations to reduce budget deficits, in addition to funding its domestic agenda. Biden also increased the budget for the IRS, so that it can collect unpaid taxes and possibly reduce the debt by hundreds of billions of dollars over 10 years.

Republican lawmakers have called for large cuts to non-defense government programs and the repeal of clean energy tax credits and spending passed in the Inflation Reduction Act. But Republicans also want to trim Biden’s IRS funding and cut taxes further, both of which could cause the debt to worsen.

Both claims are previews of cases that will likely be put to voters in this year’s presidential election.

White House spokesman Michael Kikukawa put the blame on the GOP, saying in a statement that the steady accrual over years was “trickle-down debt — driven overwhelmingly by repeated Republican giveaways skewed to big corporations and the wealthy.”

By contrast, Republican lawmakers have said that borrowing during the Biden administration contributed to the 2022 spike in inflation rates that dragged down the Democratic president’s approval ratings.

Akabas said, “There is growing concern among investors and rating agencies that the trajectory we’re on is unsustainable — when that turns into a more dire situation is anyone’s guess.”

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

View | A primer on debt

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

A certain section of commentators has raised concerns regarding the sustainability of India’s debt levels. They have observed the high debt levels and have pointed out the economic implications of the same.

Unfortunately, much of the discussion is too often focused on the Union Government and its fiscal arithmetic rather than focusing on the heterogeneity in fiscal health across various state governments.

Abstracting away from issues relating to differences across states, there is an attempt to argue that the Union Government is suffering from a precarious debt profile. Such a narrative is unfortunate given that there is little merit in drawing such conclusions.

India’s Union Government debt has certainly increased due to the pandemic, but in recent years it has started to return to the pre-pandemic levels. Much of this increase in public debt was on account of providing necessary support to vulnerable households during the pandemic, followed by a round of fiscal push to revive growth.

The revised estimates for 2021-22 and provisional estimates for 2022-23 show a decline in the central government debt to total liabilities.

The increase in public debt levels during the pandemic was not unique to India. Every country experienced an increase in their total liabilities as they attempted to cushion the impact of lockdown on their respective economies.

For the sake of simplicity, let us assume a counterfactual wherein the government did not undertake a necessary expansion in public debt. The implication of this is the lack of a fiscal stimulus during the pandemic resulting in massive bankruptcies and destruction of capital stock in the economy.

In simpler words, it would have meant settling for a lower growth rate, slower pace of economic recovery and a lower level of total employment post pandemic.

Let us assume another counterfactual where the government did not increase the debt levels by as much in the 2020-21 period. Under that scenario, the pace of economic recovery would have been lower than what we experienced, with some risks surrounding the natural or potential growth rate settling at a lower level.

This would have meant a permanent or at least a mode medium-term impact of COVID-19 pandemic on India’s growth ambitions.

It is evident from the policy advice that government received during the early days of the pandemic that public debt levels were to increase. Recall how the consensus view at that time (barring a few, including the authors) was to spend without worrying about fiscal space.

Some of the non-conformists had stressed on the temporal implications of stimulus such as heightened inflation in the event of massive stimulus during lockdowns. In many ways, these complex trade-offs were managed well by following an iterative policy approach to designing the stimulus. Such an approach was crucial in restricting fiscal spending to a point where it became unsustainable.

The second issue that we highlight is the issue of debt sustainability. As of March 2023, India’s external debt stood at $624.7 billion, marking a notable decline in the external debt to GDP ratio to 18.9%, compared to 20.0% the previous year. This improvement is significant when viewed against the backdrop of the ratio being 23.2% in 2014.

In a comparative analysis with other Low-and Middle-Income Countries (LMICs), India’s external debt scenario appears robust. One of the critical measures of this robustness is the share of short-term debt in the total external debt, where India’s figure stands at 18.7%.

This is relatively lower than that of other LMICs like China, Thailand, Turkey, Vietnam, South Africa, and Bangladesh, which have higher percentages. A lower proportion of short-term debt is beneficial as it implies less immediate repayment pressure.

Further, when considering the ratio of total external debt to Gross National Income (GNI), India emerges as the third least indebted country among all LMICs. This is a vital indicator of a country’s ability to handle its external debt.

Additionally, the ratio of India’s total external debt to its exports is at 91.9%, positioning it as the fifth least indebted country in this aspect among LMICs.

It is expected to continue this trajectory, more so as revenues and growth both remain buoyant. Moreover, the reduction in inflation would allow the government to manage its debt more effectively going forward as interest rates gradually return to the pre-pandemic levels.

A key overall increase in net borrowings in India is driven by the massive outlays on developing physical infrastructure, both in public and private sector. The private sector had luckily managed to reduce their leverage in the years preceding the pandemic, and many of them are gradually borrowing money to make fresh investments.

Another important trend following massive financial inclusion in India is the subsequent expansion of credit, much of it in the form of personal loans, in the form of buy no pay later or credit card debt. This is not unique to India and is perhaps to be expected given the increasing importance of finance and improvement in financial literacy.

Notwithstanding the irrationality of pessimism surrounding India’s public debt profile, there are reasons to reflect on the economic incentives that are offered to Indian states. The latter is perhaps more important, and often much ignored.

When badly run states are able to borrow money at similar rates than states that are prudent in their fiscal management, it is natural to wonder if the incentive structures encourage bad behavior?

This is particularly true during state election cycles that often see unsustainable fiscal promises being made in an effort to generate political capital at the expense of public resources.

Central government has already introduced policy measures which have linked reform with borrowing incentives aim to improve efficiency and performance and will enable states to borrow additional funds. This is a step in right direction.

— The authors, Vivek Singh, is Ex- OSD to the Finance Minister and Karan Bhasin, is New York based Economist.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bottomline | Why US debt woes may be an opportunity

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Global rating agency Moody’s has changed its outlook on US sovereign debt to negative even as it has retained the top Aaa rating. The move suggests a step towards a downgrade if financial conditions don’t improve. At the core of Moody’s concerns is unbridled fiscal spending. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability,” the agency said.

It is important to note here that Moody’s isn’t the first to caution on the deterioration in US fiscal health. Fitch had in August cut its rating to AA+ from AAA. While a potential downgrade is a key risk to factor in for investors, and it could push yields higher to factor in the cut, it is unlikely to cause a significant stir for two reasons: first, much of the fiscal health has already been factored in by the markets, and second, US debt is still among the safest bets for large investments in the world.

Given this, let’s look at what this development and the “higher for longer (rates)” stance of central banks can spell for investors.

What history tells us

Bond markets in the US, like any other, have had their share of tops and troughs. No market has a linear move, and this provides patient investors an opportunity for gains. Interest rates being higher for longer is good news for investors as it allows them more time to lock-in funds for the long term at higher yields.

A look at how the US market has behaved over the years suggests a sharp decline in yields after every top. The median and mean declines from tops to troughs since 1981 stand between 43% and 44.3%. Even the most recent three instances have seen drawdowns between 25% and 36.5%. These sharp moves present significant opportunities also for capital gains.

Here, the unprecedented rise in yields in the recent past needs to be appreciated. US bond yields have moved up from a low of 0.38% in 2018 to a high of 5% in October 2023—that’s in just five years. In contrast, yields, after hitting a high of 7.9% in November 1994, dipped to a low of 2% in June 2008. That’s a good thirteen-and-a-half years for a 6% move. And while we did see a big move from 15.8% in September 1981 to 10.2% in February 1983, in terms of percentage change, it is clearly dwarfed by the recent move to a high of 5%. What this suggests is that any correction of this unprecedented move, if and when it occurs, could be swift and big.

Source: Investing.com

But the big question on everyone’s mind is: Have interest rates peaked? The narrative on this is evolving even as I write this. From interest rates having topped out a week ago, there now seems to be some shift of bets towards another rate hike with a no interest rate cut but higher for longer narrative. But sift through the commentary, and what emerges is that most don’t see interest rates heading much higher. For long-term investors, that’s as good a cue as possible. Locking into higher rates by investing a part of your total allocation over the next 6 to 9 months could be a good approach.

ALSO READ | Should investors chase yields?

The case of US bonds

There are two reasons for Indian investors to consider investing in overseas bonds. First, is the attractive returns they offer. The second, is the relative safety (academically in the short-term). Let’s look at this. On a plain reading, US bond yields on a 10-year security at near 4.7% would look unattractive vis-à-vis the near 7.3% on Indian Government securities of a similar tenure. However, for a fair comparison, the dollar-rupee factor must be brought into the equation. Over the past 20 years, the rupee has depreciated at a compounded 3% per year against the US dollar. If you add that to the US bond yield, the ultimate return climbs to 7.7%.

Source: investing.com

What’s more, just like with any other debt instrument, investors should take note of the rating quality of the debt they are investing in. Here too, the US scores among the highest ratings in the world, despite recent concerns. Moody’s still retains an Aaa rating for the US, but ascribes a Baa3 rating to Indian sovereign debt. A look at the ratings snapshot below offers a perspective.

Source: Tradingeconomics

Here, it pays to mention that in the near term, barring any unforeseen, radical developments, for all practical purposes, US Government and Indian Government debt can be considered equally safe with respect to payment of interest and return of principal. Hence, a significantly lower rating alone should not prompt you to shift allocation from local bonds to overseas bonds.

ALSO READ | Rupee hits a new low as RBI ends jinx of 83.30; Refinitiv gets a rap

Good time to bond

For investors, the important point is that this could be a good time to invest in debt. But look for safe options rather than get drawn by mouth-watering yields, as high yields only come with higher risk. While the more informed could consider corporate debt as an option, for most investors, government securities are a better direct investment option. Investors can also look at gilt funds and debt funds with a healthy performance track record.

Happy investing!

Read more from CNBC-TV18’s Sonal Sachdev

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Jaiprakash Associates makes startling disclosure about default

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Jaypee Group’s flagship firm Jaiprakash Associates made a startling disclosure on Monday, November 6,  that it had defaulted on a borrowing of ₹4,258 crore from banks and financial institutions.

A sum of ₹4,258 crore, including principal and interest amount, was overdue as on October 31, 2023, as per a company statement. 

The company said now its total borrowing, including interest, stands at ₹29,272 crore that is repayable by 2037. Out of that, ₹18,682 crore will get transferred to the proposed special purpose vehicle (SPV) for which the Scheme of Arrangement will have to be approved by shareholders and NCLT, the company stated.

“The entire loan is in any case under restructuring,” it said.

In response to the crisis, it stated in its release, “As a responsible borrower, the Company has been taking tangible steps to reduce the borrowings. Post the proposed divestment of the Cement Business and the restructuring under consideration, the borrowing will get almost to Nil upon implementation of the revised restructuring plan.”

In October, after years of stagnation in resolving the debt issue with Jaiprakash Associates, a recent NCLT order revealed that the ICICI Bank and JP Associates have jointly requested the NCLT to postpone the IBC hearings until the end of November.

Both parties have indicated that they are currently engaged in negotiations for a loan restructuring proposal.

The Jaiprakash Associates stock dipped 1.75 points, or 9.56%, to ₹16.55 at NSE.

Also Read:ICICI Bank, JP Associates in talks over loan recast settlement 

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Tupperware shares rise on agreement with lenders to restructure debt

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Tupperware Brands (TUP.N) said on Thursday it has finalized an agreement with its lenders to restructure its debt obligations in an effort to turnaround its business, sending its shares soaring 57 percent after the bell.

The agreement will help the company to reduce or reallocate about $150 million of cash interest and fees, and would give it immediate access to a revolving borrowing capacity of about $21 million.

Known for its plastic airtight storage containers and bowls, Tupperware has seen a sharp drop in demand recently as consumers limit discretionary purchases amid higher prices and fears of recession.

The company had on April 7 raised doubt about its ability to continue as going concern after failing to improve its business for about three years. The company reported $705.4 million in total debt for 2022.

In May, it signed investment bank Moelis & Co to help explore strategic options and said it has found additional prior period misstatements in its financial reporting.

The agreement also paves the way for the extension of the maturity of about $348 million of principal and reallocated interest and fees to 2027 with payment-in-kind interest.

It is also expected to aid a reduction of amortization payments required to be paid through 2025 by about $55 million.

Despite the going concerns, the company’s shares have gained nearly 541 percent between July 21 and July 31, mirroring the moves seen in financially challenged companies like Bed Bath & Beyond and other “meme” stocks known for their popularity with retail investors.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

A $1 trillion coin and the US debt ceiling deadlline

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

You would have heard financial market experts talking about the fast-approaching US debt ceiling deadline and how the risk of a default by the US, is being completely underappreciated by the markets.

To be fair, markets have learnt to take this issue in its stride. After all, the US has always raised/extended/suspended/revised the debt ceiling and has always honoured its debts. As JPMorgan points out, since 1960, the US Congress has done this 78 times – under both Republican and Democratic Presidents. Markets are confident of a resolution this year as well.

Before I get to the title of this piece – ‘$1 trillion coin?’, let me quickly explain the US debt ceiling deadline as a concept.

Like any other government, the US government has expenses – lots of it! The big ones are – employee pay, spend on programs (Defense, Social Security, Medicare, Medicaid, etc) and pay interest on the public debt. To fund these responsibilities, the US government collects taxes. And it funds the difference by issuing debt.

Also Read: Who’s who in the debt limit fight: Meet the four negotiators who could save the US from default

Now the US Congress specifies an aggregate debt limit that applies to all federal US debt. That number currently stands at $31.4 trillion. US Treasury Secretary Janet Yellen wrote to Congressional leaders earlier this month, saying Treasury “will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.”

So by early June, less that 10 days away, without a political deal to raise/extend/suspend/revise the debt ceiling, the US government will be out of money!

Now lets get to the interesting part. While the clearest path to dealing with the debt deadline, is for the US Congress to raise the debt ceiling – this means politicians (both Democrats and Republicans) coming together and agreeing to a resolution – a hard ask anywhere!

Also Read: What is US debt ceiling — what ‘catastrophe’ awaits if Joe Biden’s govt defaults | Explained

Without political agreement, what can the US government do ?

Here is the oddest solution! The US government/Treasury can mint a trillion-dollar platinum coin. By a quirk of the law, the face value of platinum coins minted by the Treasury is not limited. The idea here is to mint the trillion-dollar coin, deposit it at the Fed, and exchange it for funds. This would require the Fed to be onboard – which is not a given.

But if it came to it, would a $1 trillion coin do the job ? Yes and no. While it would avoid a default, it would most likely corrode confidence in the US monetary system. And preserving faith in the system is one of the big goals of avoiding a default!

A political solution, like always, would be the best one.

Also Read: Republicans must move off ‘extreme’ positions, no debt limit deal solely on its ‘partisan terms’: Joe Biden

Also Read: Why Mark Matthews thinks US debt ceiling is not an issue

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why Mark Matthews thinks US debt ceiling is not an issue

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Market expert Mark Matthews, Managing Director at Bank Julius Baer & Co, doesn’t think of the US debt ceiling as an issue and says he agrees entirely that US President Joe Biden is very good at negotiating.

“So, he decided to do it after he said he would not do it with the Republicans. And so, we will have a deal and we always would have had to deal, we know that. And the worst-case scenario is he would have invoked this archaic amendment 14th, which says, the US shall never default on its debt. So, I don’t think the debt ceiling is an issue,” he said in an exclusive interview with CNBC-TV18 on May 18.

Matthews’ remark comes as investor sentiment got a boost after leaders in Washington indicated that they are moving forward on the debt ceiling talks.

Throughout its history, even in challenging times, the US has managed to uphold its financial commitments, instilling confidence among investors and maintaining stability in global markets. This long standing reliability has positioned the US as a safe haven for investments worldwide.

What is the US debt ceiling?

It is the maximum amount of money Congress allows the federal government to borrow to cover its bills. This is because the government generally spends more money than it collects in taxes, so it must take out debt to pay its expenses. Unlike a credit card, though, the expenses were already approved by Congress, so the debt ceiling does not pertain to new spending.

Also Read: Joe Biden and Kevin McCarthy hopeful on debt ceiling deal, US president cuts Asia trip short

In order to simplify borrowing, this mechanism was created during World War I. Prior to 1917, Congress needed to approve additional debt for each new spending measure it passed.

Congress has lifted the debt limit 78 times since 1960. The debt ceiling was last raised in December 2021 by $2.5 trillion, capping the limit at $31.381 trillion.

Also Read: What is US debt ceiling — what ‘catastrophe’ awaits if Joe Biden’s govt defaults | Explained

Matthews also spoke about the weaknesses in several US banks, citing six major banks in the country grappling with internal issues. Though he didn’t specify exact reasons behind vulnerabilities, his statement underscores the importance of maintaining a robust and transparent banking sector, as any weaknesses can have ripple effects on both domestic and international markets.

He also reflected on the historical trend of a rising US dollar acting as a headwind for Asian markets. Traditionally, when the value of the US dollar appreciates, it exerts downward pressure on Asian currencies, affecting exports, trade balances, and overall investor sentiment. Asian economies, which heavily rely on exports, can face challenges in maintaining competitiveness and achieving desired growth rates in such scenarios.

Also Read | Who’s who in the debt limit fight: Meet the four negotiators who could save the US from default

The United States’ commitment to honouring its debt obligations offers a sense of security to investors, fostering stability and confidence in the global financial system. However, the weaknesses observed in a few banks serve as a reminder of the significance of vigilance and robust regulatory frameworks to ensure the health of the banking sector.

(With agency inputs)

For more details, watch the accompanying video

Also, catch all the live updates on markets with CNBC-TV18.com’s blog

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Kalyan Jewellers intends to sell aircraft to reduce gross debt by 15% in FY24

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Kalyan Jewellers India, one of India’s leading jewellery retailers, is currently exploring various strategies to reduce its debt burden. One of the strategies being considered is the sale of aircraft owned by the company. The proceeds from this sale would be utilized to reduce the existing debt. The gross debt is expected to reduce 15 percent in FY24.

However, Kalyanaraman acknowledged that completing the aircraft transaction will not be an overnight process. He estimates approximately 5-6 months to finalize the sale and complete the necessary procedures. This timeline indicates the complexity and diligence involved in such transactions, especially when dealing with valuable assets like aircraft.

In an interview with CNBC-TV18, Ramesh Kalyanaraman, Executive Director of Kalyan Jewellers said that the company intends to sell aircraft and the proceeds of the same will be used to pare down debt.

Also Read | This jewellery maker’s stock may shine 20% more led by recovery due to gold prices: Analysts

He said, “It’s part of our strategy which we decided last year wherein we want to liquidate certain non-core assets in the company, which includes the aircraft and we already signed a letter of intent (LoI) to sell those aircraft and that is why the onetime write-off is there in the books and the proceeds will go and decrease our bank exposure or anything which is more capital efficient is what we will do with the money which comes in.”

In addition to the aircraft sale, Kalyan Jewellers pledged land parcels as collateral against bank loans. This move demonstrates the company’s proactive approach to managing its financial obligations. By providing collateral, Kalyan Jewellers aims to secure favourable terms for its loans while maintaining its commitment to repaying the borrowed funds.

The decision to utilize land parcels as collateral underscores the company’s confidence in its core business operations and assets. Kalyan Jewellers recognizes the value of these land parcels and believes in their potential to generate returns in the future.

Also Read | Titan says it will focus on studded jewellery, premiumisation and wearables segment

As Kalyan Jewellers continues its efforts to reduce debt, the sale of aircraft and collateralization of land parcels represent significant steps toward achieving its goals. By carefully managing its financial obligations, the company aims to strengthen its balance sheet and create a more favourable financial position for itself and its stakeholders.

Also Read | Kalyan Jewellers Q4 net profit dips, margin pressure seen; co announces dividend

Kalyan Jewellers, on May 15, reported a 1.6 percent year-on-year (YoY) decrease in its consolidated profit after tax to Rs 71 crore for the quarter that ended March 31, 2023. The company reported a net profit of Rs 72 crore in the same quarter of the previous fiscal year. The board has recommended a final dividend of Rs 0.50 paise, which is 5 percent per equity share of Rs 10 each, for fiscal 2023.

For more details, watch the accompanying video

Also, catch all the live updates on markets with CNBC-TV18.com’s blog

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bottomline | Good time to be in debt

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

The big fear for equity investors is that interest rates are likely to push higher. That’s not such a bad thing for those looking to put money in fixed income yield instruments.

The US 2-year government bond yield is now trading just below the 5 percent level, a yield last seen in 2006, that’s 17 years ago. The last peak for the 2-year bond was near 3 percent in 2018. So, the current yield is the best the instrument has offered in quite a while. This makes debt very attractive for investors in the US and heightens the risks for investors in risky assets globally.

Equity vs debt today 

Equity has traditionally been a far better asset class to be in, in India, than debt. We looked at the 12-month rolling returns of the Nifty since 1996 and found that the average return delivered has been a very health 14.5 percent. However, these include months of heady returns 70 percent+ and months of heavy drawdowns 50 percent+, hence returns for investors would vary vastly based on when they got in and got out.

That said, the returns in recent months have been quite disappointing. Trending at rates mostly well below the fixed-income yields. And given the risks to equities posed by further monetary tightening, this may be a good time to start locking-in to some high yield debt, which even for short tenures is offering attractive yields of well over 6 percent.

Also Read: Food for Thought | The search for meaning in the era of social madness

Taking calculated risks

Even in debt, while the returns on the safest instruments like bank deposits and g-secs is not as attractive as what you might get on corporate debt, there’s a case for taking calculated risks on paper of well-heeled corporates.

While top banks offer about 6.6-6.8 percent on a one-year deposit, the rate on a one-year corporate deposit could be a good 40-50 basis points higher.

Also Read: Enabling Education-2: Here is why lifelong learning becomes imperative in a changing world

Should you take the risk for that extra bit? This needs to be approached smartly. Big brands with strong financial underpinnings like HDFC or ICICI are unlikely to default (the biggest risk in high yield debt instruments). In fact, HDFC is an interesting case where ahead of the merger, the housing finance company is offering a significant spread over the banking arm’s rates.

(*0.05 percent extra on online deposits | * At monthly rests. Additional 0.25 percent on renewals | Source: PaisaBazaar)

But remember, your decision on the form of fixed income instrument you choose to invest in must also be driven by the taxes applicable to you on these. So, pick what gives you the best post-tax return. But this clearly looks like a good season to be in debt.

Also Read: Bottomline | Business isn’t booming, but there’s hope

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Carbon Resources & McLeod Russel promoters to jointly settle lenders’ dues | CNBC-TV18 Exclusive

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Carbon Resources and McLeod Russel promoters are likely to jointly offer a one-time settlement of Rs 1,100 crore to lenders.

CNBC-TV18 learns that as part of the settlement, there will be 100 percent recovery for secured lenders and 60 percent recovery as far as unsecured lenders are concerned.

Sources also tell CNBC-TV18 that a board meet of McLeod Russel in this regard is likely to take place soon.

So how will McLeod Russel manage to garner the funds for the same? It is learnt that there would be an asset monetisation plan to Carbon Resources, which would mainly include the sale of some domestic tea assets.

The other option that company may look at is to do an equity infusion by Carbon as well as by promoters of McLeod Russel.

Another option on the table is to opt for the sale of non-core assets. For instance, McLeod Russel owns a 2.29 percent stake in Eveready industries.

ICICI Bank, Axis Bank, State Bank of India, Punjab National Bank, HDFC Bank and Indian Bank are some of the secured lenders, while unsecured lenders include Yes Bank and RBL Bank.

CNBC TV-18 had reported that the lenders received a non-binding Letter of Intent from Carbon Resources on September 16. Carbon Resources had offered to infuse upfront equity worth Rs 300 crore and fresh debt worth Rs 945 crore to resolve the outstanding debt.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow