Mumbai: Funds raised overseas through foreign currency convertible bonds (FCCBs) continue to haunt Indian companies as many are defaulting on redemption and are being dragged to court.
The latest in the line of fire is Punjab-based textile company JCT Ltd. A clutch of overseas bondholders has sued the firm after it failed to redeem convertibles, to stop it from restructuring its debt that could delay recovery of their dues.
Investors have in the recent past sued firms such as Wockhardt Ltd, Zenith Infotech Ltd, Sterling Biotech Ltd and KSL and Industries Ltd after these firms failed to meet repayment commitments on FCCBs.
JCT raised $30 million through FCCBs in 2006, which were subscribed by some overseas investors including international hedge fund QVT Financial LP, the same firm that had taken Wockhardt to court in 2010 after the Mumbai-based drug maker failed to redeem $110 million of FCCBs. Wockhardt has since repaid its bondholders.
An estimated $2.97 billion worth of FCCBs sold by 33 Indian companies are due for redemption by December, according to KNG Securities Llp, a dealer in corporate finance.
FCCBs can be converted into equity on maturity. However, if the share price of the issuer falls below a predetermined level, investors have the right to ask for redemption of the bonds in cash.
Indian companies are increasingly turning defaulters to such investors after facing difficulties to generate cash flows from diversifying operations, large capacity expansions, or a crisis in their respective sectors.
A slowdown in Asia’s third largest economy, lacklustre demand for products, and high interest rates have hamstrung the ability of Indian companies to repay debt.
Defaults to unsecured lenders such as FCCB holders have been typically followed by the inability of Indian corporations to service loans of domestic lenders, primarily commercial banks.
For instance, a sizeable chunk of about Rs.6,000 crore in loans given to several companies of Mumbai-based Sandesara Group had turned bad or is on the verge of turning bad shortly after a group of investors who had subscribed to Sterling Biotech’s FCCBs filed a suit in a British court after the company defaulted on $184 million worth of bonds. The matter is still in the courts, as is the case with Zenith.
“It’s a big risk for secured lenders as well,” said A.S.V. Krishnan, an analyst at Ambit Capital Pvt. Ltd, a brokerage. “Although when a company defaults on FCCBs, it doesn’t immediately affect secured lenders, but there can be a cascading impact as covenants get breached.”
Not long ago, Mumbai-based textile group led by the Tayals—KSL and Industries—too faced a similar situation when the company failed to meet a 19 May deadline to redeem $90 million worth of FCCBs, including interest. The company is currently negotiating with banks to restructure its loans.
In April 2011, JCT failed to pay $26 million it owed these investors. Instead, it began negotiations with commercial banks to restructure its debt, prompting Bank of New York Mellon Corp., the trustee of bond holders, to sue JCT in September on their behalf, seeking to recover the money.
The Chandigarh high court has barred JCT from creating any fresh charge on its assets or selling immovable assets. A copy of the order has been reviewed by Mint.
The legal directive could stall JCT’s efforts to restructure about Rs.300 crore of loans from state-run banks including Allahabad Bank, Bank of Baroda and Punjab National Bank. This includes a part of unsecured loans raised from investors.
JCT is expecting about Rs.45 crore of fresh funding as working capital to aid operations and plans to sell some of its land in Phagwara, Punjab, to generate cash flows to pay lenders. Chairman and managing director Samir Thapar said the court order will not halt the debt recast.
“This order will no way impact the CDR (corporate debt restructuring) process as banks have already sanctioned Rs.45 crore loans, which will be released by end November,” Thapar said. “Also, the proposed sale of land will be done at a later stage and not immediately. About 65% of the unsecured bondholders have agreed to restructure the loans.”
Started in 1946, JCT is a manufacturer of textiles and filament yarn, and is the flagship of the Thapar Group. It has business interests in cotton, synthetic and blended textiles, and nylon filament yarn.
In the September quarter, JCT posted a loss of Rs.10.77 crore, lower than the Rs.31.76 crore loss recorded in the same quarter a year ago.
Its shares on Friday fell 2.11% to Rs.1.39 on BSE Ltd. From their peak of Rs.22.20 in August 2005, JCT shares have lost 93.47%.