The deepening rot

The benchmark index may be flirting with 20K levels, but the undertone remains far from bullish. A case in point is companies that had issued foreign currency convertible bonds (FCCBs) at the height of the bull run; most of them are now facing defaults as post 2008 crisis, their share prices have hit the nadir. Currently, over 40 Indian convertible issues are past their due dates, with promoters obligated to pay over $2 billion to bondholders since the conversion prices are way below the issue price. According to London-based KNG Securities, the bulk of Indian convertibles was issued between 2005 and 2007. “At the time, Indian issuers thought their shares were going to the stars and, hence, repayment provisions were not a consideration. The unpredicted and seismic events of 2008 ended the party and Indian issuers suddenly found themselves staring at a rather large debt pile,” states a KNG report. Not surprisingly, the number of convertible issues has fallen from the peak of 72 in 2007 to around four in CY13.

While most issuers are in restructuring talks with bondholders, many companies don’t seem to be in a position to do so. “Many investors will question whether these companies ever had the ability to repay foreign convertible investors,” says Arup Ganguly, founder, KNG, highlighting the defaults by Prime Focus and Suryajyoti Spinning. 

What is further compounding the problem is currency depreciation. The rupee has depreciated almost 20% in the June quarter and, importantly, a whopping 33% since the 2005-2007 period, when the bulk of issuance occurred. To address the issue, the RBI has allowed companies to raise external commercial borrowings to retire/ refinance the FCCBs. Of the $32 billion worth of overseas commercial borrowings raised in FY13, around 11% was used for addressing FCCB redemption and refinancing of ECBs and domestic loans. In fact, Suzlon, which has outstanding FCCBs worth $500 million, had raised $647 million via Eurobonds earlier this year to refinance existing debt. But the beleaguered wind turbine maker could raise the funds largely because it carried a safety net in terms of bank guarantee. “Since the Suzlon bonds are guaranteed by SBI, the credit risk is on the bank and not the company,” says Ganguly.

Not all companies are as lucky to benefit from the largesse of Indian banks. Most bondholders will either have to drag the issuer to court or stick it out through negotiations. “For most institutional investors, their Indian holdings are not a significant enough part of their overall portfolios to warrant going through the legal process and only those fund managers who have a local presence and are willing to sit in court to see the process through, succeeded in squeezing money out of delinquent promoters,” says Ganguly, adding, “We are yet to hear of another success story following the Wockhardt win.”