Download - SP Report-Indian FCCB_21Jun2012 (2)
Pileup Of Indian Foreign CurrencyConvertible Bond Maturities WillTest Issuers And InvestorsPrimary Credit Analyst:Vishal Kulkarni, CFA, Mumbai (91) 22-3342-4021; [email protected]
Secondary Contacts:Abhishek Dangra, Mumbai (91) 22-3342-3815; [email protected] G Smith, Singapore (65) 6239-6380; [email protected]
Research Contributor:Srinath VL, Mumbai; [email protected]
Table Of Contents
Only A Few FCCB Redemptions Are Likely
How We Classify FCCB Issuers
Key To The Sustainable Growth Of The FCCB Market
Related Criteria And Research
June 21, 2012
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Pileup Of Indian Foreign Currency ConvertibleBond Maturities Will Test Issuers And InvestorsFor some Indian companies, issuing foreign currency convertible bonds (FCCBs) during the stock market boom of
2006-2008 seemed like a bright idea. But it's now turning into a nightmare. The bonds are usually U.S.
dollar-denominated, and have a fixed maturity date and low interest rate (0% in many cases). Investors have an
option to convert the bonds on maturity into equity shares at a predetermined price. This strategy helped the
companies get low-cost foreign currency loans for overseas acquisitions or expansion. Issuers and investors expected
India's stock market to continue to rise and the price of the companies' stock to exceed the conversion price when
the bonds matured. At that point, bondholders could have converted their holdings to equity and the issuers
wouldn't have had to repay them in cash.
This all seemed to make sense until the 2008 financial crisis led to a recession and pummeled world stock markets,
which are yet to fully recover. But now, with India's stock market still in a slump, investors don't want to convert
the US$5 billion in FCCBs that will mature in the rest of 2012 into stock that's worth 20%-90% less than the
conversion price. Instead, they want their money. The steep 30% drop in the value of the Indian rupee (INR) against
the U.S. dollar over past two years is exacerbating the problem. The result is that many FCCB issuers may have
trouble finding funds to repay bondholders–-and that those that can't will face payment default.
Overview
• The slump in India's stock market in recent years means that holders of the US$5 billion in foreign currency convertible bonds
maturing in the rest of 2012 aren't likely to convert the bonds into equity in the Indian companies that have issued them.
• Redeeming the bonds will be hard for most FCCB issuers because they have limited access to funds and borrowing rates are high.
• About half of the 48 companies with FCCBs maturing in the rest of 2012 will have to somehow restructure their bonds to avoid
default on payment.
Standard & Poor's Ratings Services believes that as many as half of the 48 companies with FCCBs maturing in the
rest of 2012 may default. To avoid that fate, they would have to restructure the bonds. Their options include: (1)
roll over the bonds with later maturity dates and higher coupons; (2) lower the conversion-to-equity price; or (3) get
bondholders to accept only a partial repayment of their principal. Perhaps only five of these companies are placed
well enough to pay off their FCCB debt, in our opinion. About 28 companies are likely to have to choose one of the
other possible restructuring options. Of our rated entities, Tata Motors Ltd. (BB-/Stable/--) is likely to redeem its
FCCBs at manageable costs this year and Tata Steel Ltd. (BB/Stable/--) has already rolled over the maturity of its
bonds.
Only A Few FCCB Redemptions Are Likely
The FCCB issuers find themselves in a fix because of a tepid global economy. This has slowed the issuers' revenue
and profit growth, dragged down their stock prices, and left them less able to service debt. Were they to pay off their
FCCBs, about one-third of the issuers would be left with EBITDA-to-interest coverage of less than 1.5x (meaning
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operating cash flows will barely be able to meet interest liabilities).
Access to loans is limited and borrowing costs are high
We expect most of the 48 companies to try to borrow via external commercial borrowings or through qualified
institutional placements (i.e., seeking funds from institutional investors) to pay off their FCCB debt. The Reserve
Bank of India, the country's central bank, allows companies to take the external commercial borrowing route to
redeem FCCB bonds. The maximum interest rate allowed on such borrowings is LIBOR plus five percentage points.
Orchid Chemicals & Pharmaceuticals Ltd., Hotel Leela Venture Ltd., and The India Cements Ltd. have in the past
redeemed FCCBs in this manner. We believe JSW Steel Ltd. will do the same, probably in June 2012. However, this
option is available only to companies with strong credit profiles. Moreover, overseas branches of Indian banks
provide most of such loans and could be constrained by their sometimes limited access to U.S dollars.
We estimate that interest expenses will rise by 25%, on average, for companies 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. However, the cost of borrowing to pay off the FCCBs would be
much higher--about 6% for external commercial borrowings and 10%-12% for loans from domestic commercial
banks. On an aggregate basis, we estimate that FCCB issuers will have to pay US$700 million a year in additional
interest--if they can refinance their FCCBs maturing in 2012.
Loans from Chinese banks could become an attractive funding source for some FCCB issuers. Already, Reliance
Communications Ltd. (RCom) has borrowed US$1.18 billion from Chinese banks at an interest rate of about 5%.
However, such loans are likely to be available to companies in the power and other infrastructure-related sectors
that have import-related relationships with China's manufacturing companies.
Asset sales and equity issuances offer little hope
Fresh equity issuance and asset sales are unlikely funding sources for FCCB issuers, in our view. The depressed share
prices and the low shareholding of promoters (those who help to form, organize, and finance companies) eliminate
the fresh equity issuance option. Also, it takes time to sell assets--and secured lenders may not support asset sales for
redemption of unsecured FCCBs. RCom has been trying to sell its controlling stake in Reliance Infratel Ltd., its
telecom tower unit, for some time. Suzlon Energy Ltd. plans to raise close to US$100 million from asset sales to
redeem part of its US$580 million FCCB maturities in 2012. We believe that Suzlon is unlikely to achieve this goal
because the first tranche of FCCBs mature in June 2012 and asset sales take time. Strides Arcolab Ltd. and Hotel
Leela have recently raised funds from asset sales. However, such examples are few and far between.
Weakening rupee and high redemption premiums add to the woes
The depreciation of the rupee against the U.S dollar over the past year will considerably increase the redemption
amount of maturing FCCBs in rupee terms. Most of the FCCBs that mature in 2012 were issued in 2007-2008,
when the rupee was at about INR42 to the U.S. dollar. The rupee has now plummeted more than 30% to about
INR55 per U.S. dollar. This would add about INR100 billion (about US$2 billion) to the value of FCCB maturities
in 2012.
Redemption premiums, which are about 40% in most cases, have added to the amount that FCCB issuers will have
to pay to bondholders should they go that route.
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
How We Classify FCCB Issuers
We believe that close to half of the companies that have FCCBs maturing in the rest of 2012 are likely to restructure
the bonds. We have classified the 48 FCCB issuers with bonds maturing in 2012 into four categories depending on
their likely strategy (see table 1): Likely to redeem at manageable cost; likely to redeem at high cost; likely to
restructure the FCCBs with features of a distressed exchange, as defined in our criteria; and could default on
payment. Eight companies have taken care of their FCCB maturities so far in 2012. Standard & Poor's does not rate
any of these FCCBs.
Standard & Poor's views restructurings where the issuing entity faces distress and offers less than the original
promise as defacto defaults. This is even though the investors may accept the offer voluntarily. The alternative for
investors is a general payment default, in which they stand to fare even worse. This motivates (at least partially)
investors to accept such an offer for restructuring. In case of FCCBs maturing in 2012, many restructurings are
likely to be due to issuers' operating and financial difficulties, and could resemble distressed exchanges.
Table 1
Classification Of Companies Based On How They Are Likely To Handle Maturing FCCBs
Category Key parameters and general characteristics Examples
Likely to redeem atmanageable cost
Low ratio of FCCB to total debt; good cash balances and EBITDA interestcoverage; comfortable promoter stake; favorable market capitalization inrelation to total debt and FCCB maturity amount; ability to raise externalcommercial borrowings; low leverage.
Tata Motors Ltd., JSW Steel Ltd.,Strides Arcolab Ltd., Pidilite IndustriesLtd.
Likely to redeem at highcost
EBITDA interest coverage at 2.0x-2.5x; cash not sufficient to refinance FCCBs;positive operating cash flow and leverage support fresh borrowings; externalcommercial borrowing not likely source of funds.
Jaiprakash Associates Ltd., TulipTelecom Ltd., Everest Kanto CylinderLtd.
Likely to restructure theFCCB with features of adistressed exchange
Weak EBITDA interest coverage and leverage constrain fresh borrowing; lowpromoter shareholding disincentivises fresh equity raising; market capitalizationlower than total debt outstanding; some are already under corporate debtrestructuring.
Subex Ltd., ICSA India Ltd., SuzlonEnergy Ltd.
Could default on payment Very low market capitalization; negligible liquidity; very high leverage; EBITDAinterest coverage is less than 1.0x; operating cash flow negative, low promotershareholding; accounting issues in some cases.
Murli Industries Ltd., Prithvi InformationSolutions, KLG Systel Ltd., Pokarna Ltd.,Websol Energy System, Wanbury Ltd.
Borrowers and investors seem to regard the rollover of FCCBs with higher coupons and maturity extensions as the
most acceptable forms of restructuring. In 2009, Tata Steel rolled over its FCCBs maturing in September 2012 to
November 2014 and increased the coupon rate from 1% to 4.5%. We view the company's move as an example of
financial prudence, and not a restructuring. It took action well in advance of the debt's due date and not under
duress. On Feb. 27, 2012, Subex Ltd. extended its FCCB maturity date from March 9, 2012, to July 9, 2012.
However, the company's move was due to its weak performance, depressed share price, and inability to find
funding. Subex now expects to roll over some FCCBs. Suzlon has also sought more time to repay its US$360 million
FCCBs that are due in June 2012.
Lowering the conversion price gives FCCB holders more shares on conversion; but the equity dilution is higher for
existing shareholders and the share price could therefore fall. For companies where promoters do not have a sizable
equity stake, lowering the conversion price may not be an option as promoters may not be willing to let their
holding erode further. Resetting the conversion price needs approval from the Reserve Bank and is subject to the
shareholdings of foreign institutional investors staying within the limits that the central bank has stipulated.
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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Uncertainty over bankruptcy proceedings mars recovery prospects
Slow and unpredictable legal proceedings in India in cases relating to corporate defaults are likely to deter
bondholders from taking the judicial route in Indian courts for recovery of funds. For example, investors in FCCBs
that Venus Remedies Ltd. had issued filed for liquidation proceedings after the company defaulted on its payments.
However, the investors had to settle for a negotiated maturity extension after a protracted court battle. An
unintended effect of a recent spate of legal cases by FCCB bondholders seeking liquidation of bond issuers that
default is that it may weaken the credibility of Indian FCCBs. Recovery expectations of FCCB holders may be
dashed if secured lenders to the company also consider recovery actions for defaults on secured loans. Most FCCBs
are unsecured and rank lower than secured debt in terms of repayment.
Defaults on FCCBs seem inevitable when issuers are starved for funds and bondholders insist on repayment of their
money at maturity. The defaults hamper the ability of the issuers to access international capital markets. Recent
defaulters are Wockhardt Ltd., Cranes Software International Ltd., Aftek Ltd., JCT Ltd., Venus Remedies,
Marksans Pharma Ltd., Mascon Global Ltd., Gremach Infrastructure Equipments And Projects Ltd., Pyramid
Saimira Theatre Ltd., and Zenith Infotech Ltd.
We believe the ongoing court battle between Wockhardt, which defaulted on its US$110 million FCCBs in 2009,
and investors in the FCCBs could set the tone for such cases. The court directed the company to repay FCCB holders
before paying secured creditors of the company. The matter remains pending, with the secured creditors threatening
to appeal the court decision. Another ongoing legal case involves Zenith Computers Ltd., which defaulted on its
FCCBs. The trustee for the bonds (on behalf of the lenders) has filed a winding up petition against the company.
Key To The Sustainable Growth Of The FCCB Market
The troubles confronting FCCB issuers in 2012 will cause those that have suffered the most damage to shy away
from such bonds in the future, in our opinion. In contrast, companies that are ready to issue bonds with reasonable
expectations--with 5%-6% interest rate and a conversion premium of less than 20%--should be able to attract
investors. For example, Suzlon recently issued US$150 million of FCCBs with an interest rate of 5%. The bonds are
mandatorily convertible into equity at a 10% premium to the stock market price at the time of the issuance.
Meanwhile, even the weakest companies that have FCCBs maturing in 2012 (see table 2) are unlikely to consider
defaulting on the bonds as their first option, given the messy litigation process. Many companies are in talks with
bondholders to roll over maturing FCCBs with revised terms, and with banks to refinance the bonds. Global
investors will watch for the outcome. And the future of FCCBs will likely depend on whether the new arrangements
work for issuers and investors alike.
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Table 2
The Companies With FCCBs Maturing In 2012
Corporate
Amountdue in 2012(including
redemptionpremium,mil. US$)
Coupon(%)
Maturitydate
Conversionprice (INR)
Currentshareprice(INR;as ofJune
20,2012)
Ratioof
FCCBamountto total
debt(%)
Totaldebt-to-EBITDA
ratio onredemption (x)
EBITDA-to-interestratio (x) before
redemption
ExpectedEBITDA-to-interest
ratio onredemption (x)
Redemption complete
Aarvee Denims& Exports Ltd.
5.92 0 April 11,2012
113.9 34.6 12 3.2 5 4.3
Bharat ForgeLtd.
57.03 0 April 28,2012
604 301.8 15 2.6 5.5 4.6
Kamat HotelsIndia Ltd.
19.6 5.50 March14, 2012
225 126.5 16 17.4 1 0.8
OrchidChemicals &PharmaceuticalsLtd.
167.64 0 Feb. 28,2012
348.3 111.2 49 5.3 2.1 1.5
Rajesh ExportsLtd.
25.46 0 Feb. 21,2012
67.1 136.3 5 (6.8) (2.3) (2.2)
RelianceCommunicationsLtd.
1181.51 0 March01, 2012
661.2 64.3 15 5 9.3 5.6
RuchiInfrastructureLtd.
18.78 0 Feb. 03,2012
39.2 19 34 4.3 N.A. N.A.
Tata Steel Ltd.(BB/Stable/--)
471.15 1.00 Sep. 05,2012
730.5 423.3 5 4.1 2.9 2.8
Redemption at manageable costs
JSW Steel Ltd. 391.84 0 June 28,2012
953.4 638 14 2.5 4.3 3.8
PidiliteIndustries Ltd.
51.84 0 Dec. 07,2012
204.8 161.7 84 0.9 14.9 8.2
Rolta India Ltd. 134.77 0 June 29,2012
368 73.0 46 2.2 12.7 6
Strides ArcolabLtd.
116.04 0 June 27,2012
462 758.4 23 6 2.6 2
Tata Motors Ltd.(BB-/Stable/--)
623.5 0 July. 12,2012
181.4 245.5 8 2.3 7.5 6.6
Redemption at a high cost
Easun ReyrolleLtd.
5.7 0 Dec. 5,2012
315 61.8 16 11.4 209.2 5.7
EducompSolutions Ltd.
110.75 0 July 26,2012
590 149 37 3.1 6 3.7
Everest KantoCylinder Ltd.
49.98 0 Oct. 10,2012
271.3 28.7 67 3.4 17.1 4.2
JaiprakashAssociates Ltd.
523.56 0 Sep. 12,2012
111.8 70.4 6 9.2 2.6 2.3
Karuturi GlobalLtd.
55.07 0 Oct. 19,2012
19 4.5 49 4.1 13.3 4.1
Man IndustriesIndia Ltd.
64.63 0 May 23,2012
115 104 78 5.1 13.1 2.6
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Table 2
The Companies With FCCBs Maturing In 2012 (cont.)
MicroTechnologiesIndia Ltd.
18.63 0.50 July 23,2012
250 141.1 34 1.5 11.3 7.4
PlethicoPharmaceuticalsLtd.
109.44 0 Oct. 23,2012
483.8 369.1 94 2.7 3.5 2.1
Prime Focus Ltd. 78.99 0 Dec. 13,2012
111 50.6 86 3.7 6.7 2.6
SharonBio-MedicineLtd.
23.3 0 Dec. 04,2012
252 446.3 N.A. N.A. 2.7 1.9
SuranaIndustries Ltd.
18.12 2.00 June 20,2012
137 151.7 6 8 1.9 1.7
Shri LakshmiCotsyn Ltd.
14.46 0 Sep. 27,2012
108 104.8 7 3.9 2.8 2.6
TantiaConstructionsLtd.
3.44 1.00 July 18,2012
140 51.7 4 5.3 2.1 2
Tulip TelecomLtd.
140.17 0 Aug. 26,2012
227.4 100.0 39 2.7 4.6 3.2
Uflex Ltd. 11.45 4.00 March09, 2012
145 103.5 4 2.3 3.4 3.3
Likely to restructure the FCCBs with features of a distressed exchange
FirstsourceSolutions Ltd.
240.13 0 Dec. 04,2012
92.3 8.3 125 7.8 3.2 1
Gayatri ProjectsLtd.
42.34 0 Aug. 03,2012
288 100.5 7 16.1 1.8 1.5
GeminiCommunicationsLtd.
20.5 6.00 July 18,2012
41.7 17.9 26 3.2 2.7 2.3
ICSA India Ltd. -Tranche I
32.74 2.50 April 28,2012
189.7 14.7 18 3.1 3.2 2.1
ICSA India Ltd. -Tranche II
30.01 2.50 March10, 2012
Subex Ltd. -Tranche I
85.16 5.00 March09, 2012
656 22.7 78 5.4 3.1 1.6
Subex Ltd. -Tranche II
53.05 2.00 March09, 2012
Grabal AlokImpex Ltd.
28.43 1.00 April 05,2012
51 N.A. 28 11.3 1.7 1.1
Suzlon EnergyLtd. - Tranche I
306.87 0 June 12,2012
97.3 17.5 13 12.7 0.9 0.8
Suzlon EnergyLtd. - Tranche II
175.84 0 Oct. 11,2012
Suzlon EnergyLtd. - Tranche III
53.44 7.50 June 12,2012
Suzlon EnergyLtd. - Tranche IV
32.8 7.50 Oct. 11,2012
Could default on payment
3i Infotech Ltd. -Tranche I
93.86 0 July 27,2012
154.3 8.8 9 9.4 0.9 0.9
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Table 2
The Companies With FCCBs Maturing In 2012 (cont.)
3i Infotech Ltd. -Tranche II
36.3 0 May 18,2012
Ankur Drugs &Pharma Ltd.
26.6 0 Dec. 27,2012
165 11.1 11 9.3 1.3 1.1
Great OffshoreLtd.
40 7.25 Oct. 12,2012
565 81 6 8.9 2.4 2.1
GTLInfrastructureLtd.
320.55 0 Nov. 29,2012
53 7.9 14 21.4 0.9 0.7
GV Films Ltd. 16.38 0 Oct. 23,2012
N.A. 0.5 341 (25.6) (2.9) (0.2)
Hotel LeelaVentures Ltd.
60.98 0 April 25,2012
72 31.2 8 24.9 2.9 1.9
Indowind EnergyLtd.
30 0 Dec. 01,2012
48.9 to 65 4.9 85 9.6 5.5 1.3
KLG Systel Ltd. 31.63 1.00 March27, 2012
350 17.5 60 (21) (0.5) (0.3)
KSL andIndustries Ltd.
111.58 2.00 May 19,2012
N.A. 62.6 35 13.6 0.9 0.7
Moser BaerIndia Ltd. -Tranche I
61.45 0 June 21,2012
363.9 9 8 (82.6) (0.2) (0.1)
Moser BaerIndia Ltd. -Tranche II
59.93 0 June 21,2012
Murli IndustriesLtd.
8.23 0 Feb. 06,2012
379 15.8 3 175.7 0.1 0.1
PioneerEmbroideriesLtd.
16.41 0 April 28,2012
224 9 34 32.7 0.5 0.4
Pokarna Ltd. 17.34 0 March29, 2012
236.5 81 28 12.4 0.9 0.7
PrithviInformationSolutions
76.1 0 Feb. 27,2012
469 16.3 84 16.5 1.7 0.6
Pyramid SaimiraTheatre Ltd.
122.56 1.75 July 04,2012
454 N.A. 153 3.6 N.A. N.A.
ShreeAshtavinayakCine Vision
27.34 2.88% Dec. 22,2012
8.9 3.9 40 1.9 10 6
Sterling BiotechLtd.
183.84 0 May 16,2012
163 6.5 25 6.4 2.4 1.8
Websol EnergySystem Ltd.
22.05 0 Nov. 01,2012
540 8.6 37 (3) (4.9) (3.3)
Wanbury Ltd. -Tranche I
14.41 1.00 April 23,2012
175 17.5 14 (12.9) (1.2) (0.9)
Wanbury Ltd. -Tranche II
12.66 1.00 Dec. 17,2012
138
XL Energy Ltd. 46.6 0 Oct. 23,2012
260 4.1 26 (23.6) (1.7) (0.9)
Zenith InfotechLtd.
46.7 Variable Aug. 17,2012
310.4 35 66 6.3 2.9 1.5
N.A.--Not available. Source: Bloomberg.
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Related Criteria And Research
• Principles Of Credit Ratings, Feb. 16, 2011
• Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010
• Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
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