Mumbai: The rupee’s slump is making banks jittery about companies that have substantial overseas payments coming due. Given that they wouldn’t want to default in the overseas market, the companies may prefer to overstretch themselves through domestic loans, raising the prospect of local debt having to be restructured.
Between now and December, companies will have to pay about $5 billion (around Rs.27,500 crore today) to redeem foreign currency convertible bonds, or FCCBs. These bonds are converted into equity if they match a certain price point. If they don’t, companies have to pay bond holders an agreed amount. Most companies will need to pay up as the price points haven’t been matched.
Banks are wary of making further loans as most of the companies are overleveraged besides labouring under lower earnings amid a gloomy economic environment.
That could mean more companies seeking to enter corporate debt restructuring (CDR) programmes, which involves renegotiating repayments and interest rates.
“The effect will not be seen now, but after some months or may be in a year, these companies may come to banks with restructuring proposals,” said a senior banker with a public sector bank who did not want to be named. “Already we have seen FCCB-related issues forcing companies towards CDR.”
Mint’s Anup Roy says that with the rupee still weak, banks are getting worried about companies that have to make large overseas payments
“Of course many of them are well managed, but we are worried about firms that have already overstretched themselves and are asking for further loans to pay off their FCCBs in an environment where rupee is sliding so much,” said the banker.
There’s unlikely to be an immediate crisis but the large amount of FCCB dues could trigger off a wider crisis later on in the year, bankers said.
“It is not prudent to say that only because of FCCB pressure companies will approach banks to restructure their debts. It depends on a case-by-case basis. But FCCB redemption pressure definitely adds to the existing pressure of companies that are highly leveraged,” said Bhaskar Sen, chairman and managing director of Kolkata-based United Bank of India.
“CDR is not the mechanism to discuss FCCB-related issues, but it is one of the components that adds to the problem of a company,” Sen added.
Many of the companies haven’t hedged their exposure and are vulnerable to the rupee’s weakness.
“This is a sudden explosion of liability in the companies’ balance sheet without them doing anything. They will have to approach the domestic lenders for loans and this might lead to more CDR cases,” said Vimal Bhandari, managing director and CEO of IndoStar Capital Finance Pvt. Ltd, a non-banking finance company (NBFC) that specializes in providing funds to corporate entities.
“Prudent risk management would require companies with FCCB exposure to build up provisions for repayment of the loan (and not assuming conversion) as well as hedging the forex risk. However, not many companies have adopted such measures. The current redemption-related uncertainty may have been avoidable to a large extent,” said Deep Mukherjee, director of Fitch Ratings, in an emailed response.
If the rupee continues to slide, companies with heavy FCCB dues may be in trouble.
“Rupee depreciation may have worsened the problem. But companies, indulging in heavy debt-driven capex around the peak of business cycle, usually have debt-servicing issues during slowdowns,” Mukherjee added.
According to the chief financial officer of a large private company, firms that have sought debt recasts after facing FCCB pressure may have been mismanaged.
“In the coming days also, the same will continue. With the rupee’s slide, it will add more pressure to company finances and unfortunately domestic banks may have to face defaults,” said the CFO, who did not want to be named because of the sensitivity of the issue.
The finance ministry recently sent a directive to the CDR cell, the forum that restructures corporate debt, to be cautious about underperforming companies seeking such a recast. Banks were encouraged to change the management if they were found to be inefficient.
The peak issuance years for the FCCB market were 2006 and 2007. Almost $14 billion of nominal issuance took place in this period, when the rupee was at around 40 to the dollar, according to KNG Securities LLP.
The Reserve Bank of India (RBI) typically does not allow companies to restructure FCCB dues as that is considered a default in the overseas market and hurts India’s credit worthiness.
Of late, though, RBI has allowed companies to negotiate with overseas lenders to restructure loans.
Companies that sought restructuring of their FCCBs in 2012 are Hotel Leela Venture Ltd, Subex Ltd, 3i Infotech Ltd, Zenith Infotech Ltd and GTL Infrastructure Ltd.
According to a research report published by Fitch Ratings in February, 59 Indian companies face FCCB redemptions to the tune of $7 billion in 2012.
“Fitch Ratings believes that about 63% of the amount due is likely to be repaid from a combination of internal accruals and fresh borrowings. Of the balance, 17% is expected to undergo restructuring (mostly maturity extensions) while the remaining 20% is likely to default with ensuing restructuring, possibly having significant distressed-debt exchange (DDE) features,” the report said.
Reliance Communications Ltd paid about $1.2 billion of its FCCB due in March, raising low-cost yuan-denominated loans.
Smaller firms, with speculative grade ratings of ‘BB’ or ‘B’, may not be able to raise cheap loans to redeem their FCCBs obligations. Bankers are anticipating that some may seek a recast for loans of less than $30 million on average.