Despite all the gloom and doom stories predicting a large number of convertible bond defaults, the actual number of defaults in the past two years were few and far between. Of course, a number of companies have been struggling to raise funds and repay their convertible bond investors, especially with the rupee depreciation making the outgo even higher. But, by and large, there has been an attempt by most Indian companies to honour their obligations to bondholders.
This augurs well for Indian companies who continue to look to the foreign currency convertible bond (FCCB) market to raise funds (United Spirits, for instance, plans to raise funds through this route next year.) According to an investment banker who works at the convertibles origination desk at a large foreign bank, all eyes are now on the large $1.2 billion redemption of Reliance Communications Ltd’s (RCom) FCCBs. RCom is the bellwether in the Indian FCCB market. First, it had the largest issue coming out of India—and even from an international standpoint, the issue was relatively large-sized. As a result, the number of investors exposed to the issue is much larger, and for that reason alone, is a widely tracked issue.
Most investors and bankers don’t expect RCom to default on its FCCB, which matures in less than three months.
In fact, according to sources in investment banking circles, the company is already in the market to raise funds through the external commercial borrowings route. Even so, some investors may wait for this large event in the FCCB market to smoothly pass by before making fresh investments in Indian convertible bonds.
Having said that, the main driving factor for fresh investments will be the willingness of Indian companies to tone down their expectations. The days of issuing bonds with no regular interest payouts and with the conversion price set at a high premium to prevailing stock prices are long gone. Companies now have to live with paying a 5-6% interest rate and a relatively low conversion premium of less than 20%.
Meanwhile, with 2012 around the corner, the pertinent question is about defaults. After all, there were a large number of issuances in 2007 that will mature next year. The good news is that not only have most Indian companies tried their best to honour their obligations (barring a few like Zenith Infotech Ltd, which defaulted), but even investors have been accommodating and have worked with companies to restructure the bonds in some cases. This gives some level of comfort going into 2012. Of course, if refinancing avenues dry up owing to a worsening global economic situation, things will turn out differently.
While things may not have turned out as badly from a bond investors’ perspective, from the issuing company’s perspective, FCCBs have evidently ended up as a huge liability. Many of these companies had assumed these instruments would be converted into equity. Instead, they have ended up as debt, and worse still, at the time of repayment, there is a sharp depreciation in the rupee to live with as well. It’s little wonder that the stock prices of many of these firms have underperformed in recent times.
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