Do the names Rasandik Engineering Industries India Ltd and Venus Remedies Ltd ring a bell? Perhaps not. Well, these two firms defaulted on the repayment of their foreign currency convertible bonds (FCCBs) earlier this year, according to news reports by the Financial Chronicle and The Economic Times. They had raised $10 million (around Rs48 crore) and $12 million, respectively, in April 2006 by issuing convertible bonds with a three-year maturity period.
Bond holders of a much larger firm, Wockhardt Ltd, are also likely to get a raw deal when the bonds come up for redemption next month. The company is under a corporate debt restructuring programme and FCCB holders may either have to take a large haircut on their initial investment or resort to legal action against the company.
For now, these seem like a few cases of default and far between.
According to a banker with the Mumbai office of an overseas bank, who didn’t want to be identified, there may hardly be any more defaults since the availability of funding is much easier now both through the equity and debt routes. Whenever a repayment is due, companies can raise fresh funds if internal accruals are insufficient and repay the bond holders, the banker says. In fact, a few firms such as Firstsource Solutions Ltd have taken fresh external debt and have bought back bonds at a discount, thereby reducing their overall debt burden, well before the bonds come up for redemption.
But from the next year onwards, and especially in 2011, when a number of FCCBs mature, bond holders may be in for some more pain.
Companies such as Subex Ltd, whose convertible bonds mature in 2012, have an extremely high debt position and raising fresh funds may not be easy. The company recently announced an exchange offer for its bond holders without revealing details of the new bonds.
In the past, Suzlon Energy Ltd has been successful in getting some of its bond holders to participate in an exchange offer. It must be noted that even in such cases, bond holders end up taking a hit on their investment.
The main problem with FCCBs is that a large number of Indian companies viewed them as equity issuances and gave little or no thought to these instruments ending up as debt on their books. So in internal calculations, they never featured in their calculations of debt, leading to insurmountably high debt levels, as companies such as Wockhardt and Rasandik have now discovered.
Bond holders, too, ignored sound investing principles and just assumed that a rapid rise in the Indian stock market would lead to a conversion of the bonds.
But what’s even more interesting is that in the case of Venus Remedies, it seems to be a case of a wilful default, says another banker with an overseas firm. According to this executive, the company unsuccessfully tried negotiating with bond holders, which include some hedge funds.
FCCB holders are no ordinary investors; they are typically large investment firms and Indian companies should expect intense legal action from them in the event of a default. To be sure, Venus Remedies’ bond holders have filed a winding up petition against the company, according to The Economic Times report.
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