Ghost of past defaults dooms convertible bonds for 2014

Convertible bond issuance may grind to a halt in 2014 as past corporate defaults and looming elections spook investors


Companies defaulted on $241 million of notes exchangeable into equity in 2013, or about 22% of total redemptions due, adding to the record $619 million the previous year, according to calculations based on data compiled by Bloomberg. Photo: Priyanka Parashar/Mint
Companies defaulted on $241 million of notes exchangeable into equity in 2013, or about 22% of total redemptions due, adding to the record $619 million the previous year, according to calculations based on data compiled by Bloomberg. Photo: Priyanka Parashar/Mint

Mumbai: India’s convertible bond issuance, already at a record low, may grind to a halt in 2014 as past corporate defaults and looming elections spook investors, according to SJS Markets Ltd and Sun Global Investments Ltd.

Companies defaulted on $241 million of notes exchangeable into equity in 2013, or about 22% of total redemptions due, adding to the record $619 million the previous year, according to calculations based on data compiled by Bloomberg. Convertible debt from India returned 0.12% in 2013, compared with 2.3% for the Asia-Pacific region excluding Japan, according to Barclays Plc indexes.

Overseas investors will be cautious toward buying Indian convertible debt ahead of elections to be held by May, FIM Asset Management Ltd said. The market for debt that can be exchanged for stock collapsed from the equivalent of $7.5 billion of new sales in 2007 to a lone offering of $30 million in 2013, even as India’s benchmark equity gauge hit a record.

“It’s quite unlikely there will be any convertible issuance and if there is, it will be few and far between,” Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets, said by telephone on 30 December. “It doesn’t look like India’s convertible issuance will take off.”

Geodesic Ltd, an instant messaging services provider, failed to repay $157 million of zero-coupon, dollar-denominated obligations to bondholders, when the debt fell due in January 2013, according to data compiled by Bloomberg. Bartronics India Ltd, an identification technology company, and Vardhaman Polytex Ltd, a yarn maker, also defaulted on their convertible repayments last year, the data show.

Suzlon collapse

Companies led by Suzlon Energy Ltd, India’s biggest wind-turbine maker, defaulted on a record $619 million of convertible repayment obligations in 2012, the data show. Suzlon, the wind-turbine maker that failed to repay $209 million of notes, said in October it was nearing an agreement with creditors that would cover all of its bonds including those that mature this year and in 2016.

“Currently there is no appetite for convertibles because of the defaults,” Taina Erajuuri, who helps manage more than €2 billion ($2.7 billion) of assets at FIM in Helsinki, said in a phone interview on 30 December. Investors tend to prefer coupon- paying bonds rather than convertible bonds.

“That’s unlikely to change in 2014,” said Erajuuri, who maintains a cautious outlook on the market. “Last year’s lone issue was from hospital operator Fortis Healthcare Ltd. Companies sold the equivalent of $728 million in 2012.”

General elections

National elections due by May are adding to caution among investors, as voters look set to punish Prime Minister Manmohan Singh for economic growth that has stayed below 5% for four consecutive quarters. The main opposition Bharatiya Janata Party (BJP) retained power in two states and wrested Rajasthan from the ruling party in polls through November and December seen as barometers of public perception ahead of national elections.

Central bank Governor Raghuram Rajan has increased the benchmark repurchase rate by 50 basis points, or 0.5 percentage point, since taking charge in September to curb inflation, the highest among 17 Asian economies.

India’s BSE Sensex stock index gained 9% in 2013, the best performance among benchmark equity indexes in the four-largest emerging markets. India’s government bonds, by comparison returned 1.2%, according to HSBC Holdings Plc indexes. The 10-year government note yielded 8.84% on Thursday.

Stocks gain

While the market sagged, convertible bonds produced three winners for investors in the Barclays India index. Sesa Sterlite Ltd’s 5% bond due October 2014 handed investors a 6.5% gain in 2013 while the underlying shares climbed 4.2%. Debt on Tata Steel Ltd and Tata Power Ltd also advanced.

Rakesh Arora, the head of research at Macquarie Group Ltd in Mumbai, says the BSE Sensex will advance 13% in 2014. India’s biggest drugmakers and technology companies, which get most of their sales overseas, were the five-best performers on the Sensex in 2013. An 11% decline in the rupee and rekindled economic growth in developed nations has also boosted the outlook for exporters.

The currency fell 0.6% to 62.2675 per dollar on Thursday.

Yields surge

Local companies had issued equivalent of $16.8 billion of convertibles from 2005 to 2007, when the Sensex tripled in value, according to data compiled by Bloomberg. Tata Steel, India’s biggest producer of the alloy, leads about $2.2 billion of convertible redemptions due in 2014, according to data compiled by Bloomberg.

“Investors have confidence in equities, but everybody will be watching the elections,” Raj Kothari, a London-based fixed-income trader at Sun Global, said in a 30 December phone interview. Indian convertibles will be fighting for survival in 2014, though there is still some juice left for the top companies to issue notes.

The yield on India’s 10-year government bonds rose 78 basis points in 2013, the most since 2009. The central bank’s two increases in the repurchase rate in September and October pushed up five-year borrowing costs for companies, the most since 2011. Yields for companies rated AAA by Crisil Ltd, a unit of Standard and Poor’s rose 53 basis points to 9.63% last year, according to data compiled by Bloomberg.

“Convertibles are going to be in the closet for a long time and they are off the radar for us,” Philipp Good, who manages $800 million including Indian debt at Fisch Asset Management Ltd in Zurich, said in 30 December telephone interview. “Investor sentiment has to improve before there is any chance of a revival in the convertible bond market.” Bloomberg

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