At the beginning of 2012, both the stock market players and policymakers were worried about big foreign currency convertible bonds (FCCBs) issued by corporate India that were coming up for redemptions this year.
About $7 billion of FCCBs are due in 2012. With some of the companies in question already laden with debt, there were worries about possible defaults.
However, just two months into the year, the worries seem to be dissipating, with companies redeeming their FCCBs either by raising new debt or making asset sales. A few have managed to reset the terms of their FCCBs or seen their holders convert the bonds into equity.
Taking to refinance
Bonds from Reliance Communication and Orchid Pharma, which made up 85 per cent of the dues before March, have already been redeemed. Reliance Communications, with $1.12 billion (Rs 5,825 crore) of FCCBs due in the first week of March, managed to repay them on time last week.
It managed this repayment by striking a refinancing deal with a consortium of Chinese banks. These have now been redeemed and replaced by a fresh seven-year loan reported to be contracted at an interest rate of about five per cent.
JSW Steel, which has outstanding FCCBs worth $274.6 million due by June, plans to raise external commercial borrowings (ECBs) of about $275 million at an interest rate of Libor plus four per cent a year (duration of five years) to buy back its bonds.
The option to refinance has been tapped by even smaller companies such as Gati and Orchid Chemicals, but at higher borrowing costs.
While Gati raised $22.18 million FCCBs (Goldman Sachs subscribed to it) to redeem its FCCBs in December 2011 (zero coupon bonds with a yield to maturity of 5.76 per cent), Orchid Chemicals mobilised $96.5 million through ECBs from a consortium of three banks (at Libor plus four per cent for seven-year tenure). The drug company redeemed its outstanding FCCBs worth $167.64 million on the due date, February 28.
In a report tilted ‘Indian FCCB Redemptions in 2012', rating agency Fitch makes the assessment that Reliance Communication, Tata Motors, JSW Steel, Tata Steel and Bharat Forge, which make up 38 per cent of the total FCCBs, are among the better placed to redeem their bonds.
Shedding assets
As D-day approaches, some companies have been readying the cash by selling non-core assets. Strides Arcolabs, for example, sold its 94 per cent stake in its Australian subsidiary Ascent Pharmahealth to Watson Pharmaceuticals for A$ 375 million (about Rs 1,979 crore). It has a FCCB redemption obligation of about $120 million in June.
The cash-strapped Hotel Leela, faced with FCCB redemption of $100 million by April too has resorted to shedding assets.
It sold its Kovalam property for Rs 500 crore last year and has put some of its other assets too on the block.
Sintex Industries with $280 million FCCB due in FY13 has curtailed its capex and slowed down execution in its monolithic business. This business has high working capital requirements and Sintex wants to conserve as much cash as possible.
Debt Restructuring
Worries about Indian companies failing to meet FCCB obligations, however, aren't completely unfounded.
The Fitch report names 19 companies, including GTL Infra, Gayatri Projects, Indowind Energy, 3i Infotech, Gemini Communications and ICSA India that could restructure or default on paying FCCBs when they come up for redemption this year.
While companies have the option to restructure debt, a lot will depend on the cost at which they manage to do so. Given the odds, the reset is likely to come at a higher cost. Suzlon Energy, with a repayment of its $654 million (about Rs 3,249 crore) fast approaching, is a likely candidate.
Having renegotiated its FCCB payments twice in the recent past, it remains to be seen what the company does this time.
According to a Bloomberg report, in February alone the yield on Suzlon's bonds have more than doubled. Subex on the other hand has bought itself more time from the RBI to complete re-structuring of its debt with the bondholders. It now has time till July 9 to meet $131 million FCCB redemptions that were otherwise due on March 9.
But not all companies will be required to redeem their FCCBs. Some of them can still hope to get the holders to convert these bonds into equity before their maturity date.
Rajesh Exports, which had $150 million FCCBs maturing in February 2012, saw 90 per cent of its holders convert to equity last year and opted to redeem the remaining bonds.
According to a recent report from Kotak Institutional Equities, stocks of nine companies with outstanding FCCBs are trading at a premium to their conversion prices.
Srividhya.sivakumar@thehindu.co.in