Global rating agency Standard & Poor’s today warned that 56 Indian corporates,which have to pay back USD 5 billion worth of foreign debt this calendar year,could see their interest burden going up by USD 700 million if they choose to reschedule these obligations.
In a report titled ‘Pile-up of Indian foreign currency convertible bond maturities will test issuers and investors’,S&P said the likely additional interest payout of USD 700 million arises from the steep fall in their stock valuations since the time of debt issuance and the fall in rupee.
These companies had issued these foreign currency convertible bonds (FCCBs) between 2006 and 2008 (and mostly in 2007),before the Lehman fall when the stock prices where at record high,and the rupee was trading at 48 to the dollar.
Most of these bonds are denominated in the US dollar and hence the mounting worries.
“A tepid global economy has slowed FCCB issuers’ revenue and profit growth,dragged down their stock prices,and left them less able to service debt,” said S&P credit analyst Vishal Kulkarni in a teleconference today.
The report said the recent rupee fall has added to the woes. Most of the FCCBs that mature in 2012 were issued in 2007-08,when the rupee was at about 42 to a dollar. The rupee has lost more than 30 per cent against the American currency since then.
“This would add about USD 2 billion to the value of FCCB maturities in 2012,” said the rating agency.
Terming this debt as a “nightmare” for some of these companies,the report said the deep slump in stock markets globally and the fall in the value of the rupee against the US dollar over the past two years are hurting these companies.
Standard & Poor’s further warned that more than half of the firms would have to restructure the bonds to avoid default.
“Redeeming the bonds will also be challenging for many FCCB issuers because they have limited access to funds and borrowing costs are high,” Kulkarni added.
The report further said given high interest rate scenario,these companies have the following three restructuring options: rolling over the bonds with later maturity dates and higher coupons; lowering the conversion-to-equity price; or getting bondholders to accept only a partial repayment of their principal.
The S&P report has classified these companies into four categories based on their likely strategy to pay back or tackle the maturities: likely to redeem at manageable cost;
Likely to redeem at high cost; likely to restructure the FCCBs; and could default on payment.
However,even the weakest companies that have FCCBs maturing through the rest of 2012 are unlikely to consider defaulting on the payment of their bonds as their first option,given the messy litigation process in cases related to corporate defaults,said Kulkarni.
The report also said about 28 of these companies 2012 may go for restructuring of their FCCBs as they cannot afford to raise additional funds due to the higher cost of funds. This is due to a RBI limit that demands companies to pay only a maximum of Libor plus 5 percent for foreign loans,Kulkarni said.
would be difficult in current market conditions and investors may not opt to take the judicial route for recoveries in case of defaults,he added.
Stating that only five of these 56 companies are placed well to pay back their FCCBs,about 28 others will have to roll over the bonds with higher coupons or lower the conversion-to-equity price or get bondholders to accept only a partial repayment of their principal.
“Companies will find themselves in a fix because of a tepid global economy. This has slowed their revenue and profit growth,dragged down their stock prices and left them less able to service debt,” said Kulkarni.
The Reserve Bank has allowed companies to take the external commercial borrowing route to redeem FCCBs. However,the maximum interest rate allowed on such borrowings is Libor plus 5 per cent.
But the report notes that “this option,however,is available only to companies with strong credit profiles.
Moreover,overseas branches of Indian bank provide most such loans and could be constrained by their sometimes limited access to dollars.”
Another option of lowering the conversion price will result in more shares to be given to FCCB holders but the equity dilution will be higher for existing shareholders and the share price can thus fall. Resetting the conversion price needs approval from the RBI,the report added.