S&P sees most firms restructuring FCCBs

S&P sees most firms restructuring FCCBs

Mumbai: Rating agency Standard and Poor’s (S&P) sees more than half the 48 firms that are to honour their repayment obligations towards foreign currency convertible bonds (FCCBs) in?2012?restructuring their dues or defaulting—a result of the depreciation of the rupee and a weak stock market.

FCCBs are bonds that can be converted into equity at maturity. If the share price of the issuer has fallen since, the investor has the right to ask for redemption of the bonds in cash. FCCBs carry almost no or low interest, with investors hoping to gain from an?appreciation in share prices.

The bonds coming up for conversion in 2012 were issued by firms in 2006-08 when the markets were soaring.

However, since then, the shares of issuers have fallen 20-90%, making the conversion unviable for the investor. Issuers, as a result, have to repay their bonds in keeping with their agreements; but, thanks to the 30% depreciation of the rupee over the past two years, the global slowdown, and their own unpreparedness, most issuers are in no position to do so.

According to S&P estimates, 28 firms may have to choose possible restructuring options of debt or face default. Even if they manage to get funding through external or domestic sources, the interest burden will overwhelm them. S&P estimates interest expenses will rise 25%, on average, for firms that can find funding to pay off FCCBs.

“That’s because about 80% of companies with FCCBs maturing in the rest of 2012 pay less than 2% interest on the bonds, and about 60% have a zero coupon (interest)," the agency said.

The cost of borrowing to repay FCCBs will be about 6% for external commercial borrowings and 10-12% for domestic bank loans.

“On an aggregate basis, we estimate that FCCB issuers will have to pay $700 million a year in additional interest—if they can refinance their FCCBs maturing in 2012," S&P said.

The challenge has been highlighted by other agencies as well.

According to a research report published by Fitch Ratings in February, 59 Indian firms (at the time) faced 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," that report said.

According to S&P, recent FCCB defaulters include Wockhardt Ltd, Cranes Software International Ltd, Aftek Ltd, JCT Ltd, Venus Remedies Ltd, Marksans Pharma Ltd, Mascon Global?Ltd,?Gremach?Infrastructure Equipments and Projects Ltd, Pyramid Saimira Theatre Ltd and Zenith Infotech Ltd.

“Investors are feeling let down. The issuers are not delivering on investors’ expectations and investors are offered a deal to restructure at less than the dues at a time closer to maturity. But that is the risk the investors take when they enter these transactions," said Suzanne Smith, managing director, Asia-Pacific, S&P, in a teleconference.

However, this does not affect India’s image of credit worthiness much as the FCCB market is relatively small, she added. “It’s a negative for global investors but we don’t see any specific impact on India per se."

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