Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Primary Credit Analyst: Vishal Kulkarni, CFA, Mumbai (91) 22-3342-4021; vishal_kulkarni@standardandpoors.com Secondary Contacts: Abhishek Dangra, Mumbai (91) 22-3342-3815; Abhishek_Dangra@standardandpoors.com Suzanne G Smith, Singapore (65) 6239-6380; suzanne_smith@standardandpoors.com Research Contributor: Srinath VL, Mumbai; srinath_vl@standardandpoors.com
Table Of Contents
Only A Few FCCB Redemptions Are Likely How We Classify FCCB Issuers Key To The Sustainable Growth Of The FCCB Market Related Criteria And Research
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
For some Indian companies, issuing foreign currency convertible bonds (FCCBs) during the stock market boom of 2006-2008 seemed like a bright idea. But it's now turning into a nightmare. The bonds are usually U.S. dollar-denominated, and have a fixed maturity date and low interest rate (0% in many cases). Investors have an option to convert the bonds on maturity into equity shares at a predetermined price. This strategy helped the companies get low-cost foreign currency loans for overseas acquisitions or expansion. Issuers and investors expected India's stock market to continue to rise and the price of the companies' stock to exceed the conversion price when the bonds matured. At that point, bondholders could have converted their holdings to equity and the issuers wouldn't have had to repay them in cash. This all seemed to make sense until the 2008 financial crisis led to a recession and pummeled world stock markets, which are yet to fully recover. But now, with India's stock market still in a slump, investors don't want to convert the US$5 billion in FCCBs that will mature in the rest of 2012 into stock that's worth 20%-90% less than the conversion price. Instead, they want their money. The steep 30% drop in the value of the Indian rupee (INR) against the U.S. dollar over past two years is exacerbating the problem. The result is that many FCCB issuers may have trouble finding funds to repay bondholders-and that those that can't will face payment default. Overview The slump in India's stock market in recent years means that holders of the US$5 billion in foreign currency convertible bonds maturing in the rest of 2012 aren't likely to convert the bonds into equity in the Indian companies that have issued them. Redeeming the bonds will be hard for most FCCB issuers because they have limited access to funds and borrowing rates are high. About half of the 48 companies with FCCBs maturing in the rest of 2012 will have to somehow restructure their bonds to avoid default on payment.
Standard & Poor's Ratings Services believes that as many as half of the 48 companies with FCCBs maturing in the rest of 2012 may default. To avoid that fate, they would have to restructure the bonds. Their options include: (1) roll over 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. Perhaps only five of these companies are placed well enough to pay off their FCCB debt, in our opinion. About 28 companies are likely to have to choose one of the other possible restructuring options. Of our rated entities, Tata Motors Ltd. (BB-/Stable/--) is likely to redeem its FCCBs at manageable costs this year and Tata Steel Ltd. (BB/Stable/--) has already rolled over the maturity of its bonds.
Standard & Poors | RatingsDirect on the Global Credit Portal | June 21, 2012
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Classification Of Companies Based On How They Are Likely To Handle Maturing FCCBs
Category Likely to redeem at manageable cost Key parameters and general characteristics Low ratio of FCCB to total debt; good cash balances and EBITDA interest coverage; comfortable promoter stake; favorable market capitalization in relation to total debt and FCCB maturity amount; ability to raise external commercial borrowings; low leverage. EBITDA interest coverage at 2.0x-2.5x; cash not sufficient to refinance FCCBs; positive operating cash flow and leverage support fresh borrowings; external commercial borrowing not likely source of funds. Examples Tata Motors Ltd., JSW Steel Ltd., Strides Arcolab Ltd., Pidilite Industries Ltd. Jaiprakash Associates Ltd., Tulip Telecom Ltd., Everest Kanto Cylinder Ltd.
Likely to redeem at high cost Likely to restructure the FCCB with features of a distressed exchange Could default on payment
Weak EBITDA interest coverage and leverage constrain fresh borrowing; low Subex Ltd., ICSA India Ltd., Suzlon promoter shareholding disincentivises fresh equity raising; market capitalization Energy Ltd. lower than total debt outstanding; some are already under corporate debt restructuring. Very low market capitalization; negligible liquidity; very high leverage; EBITDA interest coverage is less than 1.0x; operating cash flow negative, low promoter shareholding; accounting issues in some cases. Murli Industries Ltd., Prithvi Information Solutions, KLG Systel Ltd., Pokarna Ltd., Websol Energy System, Wanbury Ltd.
Borrowers and investors seem to regard the rollover of FCCBs with higher coupons and maturity extensions as the most acceptable forms of restructuring. In 2009, Tata Steel rolled over its FCCBs maturing in September 2012 to November 2014 and increased the coupon rate from 1% to 4.5%. We view the company's move as an example of financial prudence, and not a restructuring. It took action well in advance of the debt's due date and not under duress. On Feb. 27, 2012, Subex Ltd. extended its FCCB maturity date from March 9, 2012, to July 9, 2012. However, the company's move was due to its weak performance, depressed share price, and inability to find funding. Subex now expects to roll over some FCCBs. Suzlon has also sought more time to repay its US$360 million FCCBs that are due in June 2012. Lowering the conversion price gives FCCB holders more shares on conversion; but the equity dilution is higher for existing shareholders and the share price could therefore fall. For companies where promoters do not have a sizable equity stake, lowering the conversion price may not be an option as promoters may not be willing to let their holding erode further. Resetting the conversion price needs approval from the Reserve Bank and is subject to the shareholdings of foreign institutional investors staying within the limits that the central bank has stipulated.
Standard & Poors | RatingsDirect on the Global Credit Portal | June 21, 2012
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Table 2
Corporate
Redemption complete Aarvee Denims & Exports Ltd. Bharat Forge Ltd. Kamat Hotels India Ltd. Orchid Chemicals & Pharmaceuticals Ltd. Rajesh Exports Ltd. Reliance Communications Ltd. Ruchi Infrastructure Ltd. Tata Steel Ltd. (BB/Stable/--)
25.46 1181.51
0 0
Feb. 21, 2012 March 01, 2012 Feb. 03, 2012 Sep. 05, 2012
67.1 661.2
136.3 64.3
5 15
(6.8) 5
(2.3) 9.3
(2.2) 5.6
18.78
39.2
19
34
4.3
N.A.
N.A.
471.15
1.00
730.5
423.3
4.1
2.9
2.8
Redemption at manageable costs JSW Steel Ltd. 391.84 Pidilite Industries Ltd. Rolta India Ltd. Strides Arcolab Ltd. Tata Motors Ltd. (BB-/Stable/--) 51.84 134.77 116.04 623.5
0 0 0 0 0
June 28, 2012 Dec. 07, 2012 June 29, 2012 June 27, 2012 July. 12, 2012
14 84 46 23 8
Redemption at a high cost Easun Reyrolle 5.7 Ltd. Educomp Solutions Ltd. Everest Kanto Cylinder Ltd. Jaiprakash Associates Ltd. Karuturi Global Ltd. Man Industries India Ltd. 110.75 49.98 523.56 55.07 64.63
0 0 0 0 0 0
Dec. 5, 2012 July 26, 2012 Oct. 10, 2012 Sep. 12, 2012 Oct. 19, 2012 May 23, 2012
16 37 67 6 49 78
Standard & Poors | RatingsDirect on the Global Credit Portal | June 21, 2012
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Table 2
109.44
483.8
369.1
94
2.7
3.5
2.1
78.99 23.3
0 0
111 252
50.6 446.3
86 N.A.
3.7 N.A.
6.7 2.7
2.6 1.9
2.00 0 1.00
6 7 4
8 3.9 5.3
1.7 2.6 2
140.17 11.45
0 4.00
227.4 145
100.0 103.5
39 4
2.7 2.3
4.6 3.4
3.2 3.3
Likely to restructure the FCCBs with features of a distressed exchange Firstsource 240.13 0 Dec. 04, 92.3 8.3 Solutions Ltd. 2012 Gayatri Projects Ltd. Gemini Communications Ltd. ICSA India Ltd. Tranche I ICSA India Ltd. Tranche II Subex Ltd. Tranche I Subex Ltd. Tranche II Grabal Alok Impex Ltd. Suzlon Energy Ltd. - Tranche I Suzlon Energy Ltd. - Tranche II Suzlon Energy Ltd. - Tranche III Suzlon Energy Ltd. - Tranche IV 42.34 20.5 0 6.00 Aug. 03, 2012 July 18, 2012 April 28, 2012 March 10, 2012 March 09, 2012 March 09, 2012 April 05, 2012 June 12, 2012 Oct. 11, 2012 June 12, 2012 Oct. 11, 2012 51 97.3 N.A. 17.5 656 22.7 288 41.7 100.5 17.9
125 7 26
1 1.5 2.3
189.7
14.7
18
3.1
3.2
2.1
78
5.4
3.1
1.6
28 13
11.3 12.7
1.7 0.9
1.1 0.8
154.3
8.8
9.4
0.9
0.9
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Table 2
0 0 0 1.00 2.00 0
341 8 85 60 35 8
59.93
8.23 16.41
0 0
17.34 76.1
0 0
236.5 469
81 16.3
28 84
12.4 16.5
0.9 1.7
0.7 0.6
122.56 27.34
1.75 2.88%
454 8.9
N.A. 3.9
153 40
3.6 1.9
N.A. 10
N.A. 6
0 0 1.00 1.00 0
25 37 14
4.1 35
26 66
(23.6) 6.3
(1.7) 2.9
(0.9) 1.5
46.7 Variable
Standard & Poors | RatingsDirect on the Global Credit Portal | June 21, 2012
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Standard & Poors | RatingsDirect on the Global Credit Portal | June 21, 2012
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