Only five are placed well enough to pay off their debt

A total of 21 of the 56 companies holding an outstanding of $5 billion foreign currency convertible bonds (FCCBs) maturing in 2012 are likely to default on redemption payment, according to an S&P report.

The companies that could default include Moser Baer, Hotel Leela Ventures Ltd, 3i Infotech Ltd, GTL Infrastructure Ltd and Great Offshore Ltd, said S&P.

Twenty four companies will have to restructure their bonds to avoid the default (the rest have paid off), the report said.

FCCB, a convertible bond issued in a foreign currency, is a mix between a debt and equity instrument. “Perhaps, only five of these 48 companies are placed well enough to pay off their FCCB debt, said Mr Vishal Kulkarni, Associate, Corporate Ratings, S&P.

While seven companies including Suzlon Energy Ltd, ICSA India and First Source Solutions Ltd are likely to restructure with features of distressed exchange, the report said.

The ratings agency did not have any data when asked by Business Line if there were any hedging positions on the bonds.

Under these circumstances, the bond holders can: (1) Rollover the bonds with later maturity dates and higher coupons; (2) Lower the conversion-to-equity price; or (3) Get bondholders to accept only a partial repayment of their principal.

Given the present equity market condition, converting the $5 billion in bonds into equity is out of question for the Indian companies that have issued them, Mr Kulkarni said.

Redeeming the bonds will be hard for most FCCB issuers as they have limited access to funds, borrowing rates are as high as six per cent for external commercial borrowings and 10-12 per cent for loans from domestic commercial banks, the report said.

On an aggregate basis, the report estimates that FCCB issuers will have to pay $700 million (Rs 3920 crore) a year in additional interest – if they can refinance those bonds. It expects the interest expense to rise by 25 per cent for companies that can find funding to pay off FCCBs.

The investors that have suffered the most may shy away from such bonds in the future.

The eight companies that have completed the redemption are Tata Steel, Reliance Communications, Bharat Forge Ltd, Kamat Hotels India, Orchid Chemicals & Pharmaceuticals, Ruchi Infrastructure and Aarvee Denims & Exports Ltd.

beena.parmar@thehindu.co.in

(This article was published on June 21, 2012)
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