Most of India Inc seem to have borrowed afresh to meet their foreign currency convertible bonds (FCCB) obligations in 2012.
Of the 45 Indian companies whose FCCBs were due for redemption between March and mid-October 2012, 19 managed to redeem the bonds on the due dates. The list includes Reliance Communications, Strides Arcolab, Tata Motors, Tata Steel and Jaiprakash Associates.
However, as many as 14 of these 19 companies used new loans or fresh FCCBs to repay the bonds, says a November 2012 report by India Ratings & Research.
For instance, Reliance Communications, which had $1.18 billion in FCCB dues maturing in the beginning of March, raised loans from Chinese banks to redeem its FCCBs.
New debt
This suggests that the debt problem may just have been postponed, not solved. In fact, the new debt in many cases carried higher interest payments than the older FCCBs. This could lead to deterioration of interest coverage (ability to service interest) by 15-25 per cent, says the report.
Of the remaining 26 companies which did not redeem on time, as many as 19 defaulted or restructured their FCCBs. This confirms the fears of many market watchers at the beginning of the year that FCCBs would come home to roost in 2012.
Those who defaulted or restructured include Moser Baer, Subex and Prithvi Information Solutions. Subex, for instance, has extended the maturity period of its FCCBs to 2017.
Silver lining
But the silver lining is that restructuring or default cases accounted for only about a fifth of FCCBs by value. Those who redeemed on time accounted for two-thirds of the bonds by value.
Four companies, including 3i Infotech, agreed with their lenders to convert the bonds into equity at prices much lower than agreed before. But this is likely to have caused high equity dilution in these companies.
Companies which defaulted or went for equity conversion at lower rates accounted for under a quarter of the outstanding FCCBs. Also, three companies, including Suzlon Energy and Hotel Leela Venture, which accounted for around 9 per cent of the loans, redeemed the bonds after due dates.
FCCBs are convertible instruments used by Indian companies to raise foreign currency loans from overseas lenders. The bondholders have an option to convert the bond into shares at an agreed conversion price, before it comes up for repayment. Else, they can hold it to maturity to receive interest payments as well as the face value of bonds at the time of redemption.
At the beginning of the year, there was apprehension that deteriorating financial performance, a moribund stock market and sharp fall in the rupee (which increased loan obligations) would spell trouble for many companies which had borrowed through FCCBs.
In February 2012, India Ratings and Research had estimated that, of the 59 companies which faced redemption of FCCBs worth $7 billion during 2012, 37 per cent (around 22 companies) may restructure their debt or default on it.