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'Few FCCB re-pay options for India Inc'

February 23, 2012 12:14 IST

Only five Indian companies would be in a position to choose most available redemption options for their foreign currency convertible bonds (FCCBs), due for redemption this year, according to a report by Fitch. The rating agency said of the $7 billion FCCBs, 20 per cent were likely to face a default, owing to the stressed liquidity position of the companies.

The report said 59 companies would face redemption pressure this year. Of these, 31 companies, accounting for 63 per cent of the total FCCB redemption, would be able to repay their debt, and the options available to most of these would be limited and more costly, compared to the five companies with all the options.

The five companies -- Reliance Communications, Tata Motors, Tata Steel, JSW Steel and Bharat Forge -- account for 38 per cent of the total outstanding FCCBs in 2012 and have large internal accruals and stable ratings.

For rating purposes, from the time of issuance, Fitch assumes FCCBs as debt. The prospect of non-conversion of FCCBs to equity does not incrementally affect the ratings of Fitch-rated entities.

For the remaining 26 companies, the interest coverage ratio, or their ability to meet their interest rate obligations, is expected to decline, owing to relatively weak financial health.

"Another 26 companies have weaker financial profiles than the top five, but these should still be able to access low-cost funding with external commercial borrowings (ECBs) or high-cost domestic debt funding," Fitch said. However, given their limited funding options, interest coverage for some of these companies would deteriorate, it added.

The 26 companies are again divided into two groups of 13 firms each -- firms that have majority financing options available at a higher cost and those that have high-cost domestic finance at their disposal for redemption of FCCBs.

Companies that have most financing options available are primarily cyclical in nature or are infrastructure companies driven by government policies.

"The majority of companies in this sub-group belong to sectors in which fresh issuance of FCCBs may be challenging, owing to negative developments, ensuing risk aversion of fund providers.

Any deterioration in the cost of foreign debt may force some of these companies to actually look at domestic sources of debt. This would deteriorate their already-weakened interest coverage ratio, leading to a weakened credit profile," said Fitch. These typically constitute 18 per cent of the outstanding FCCBs.

However, the credit rating firm said the strong credit profile of these companies would give

these an edge in terms of borrowing through ECBs. Educomp Solutions, Jaiprakash Associates and Ruchi Infrastructure are some of the companies in this category.

The remaining 13 companies in this group, accounting for six per cent of outstanding FCCBs, would mostly use domestic financing for re-financing their FCCB obligations.

This group comprises large information technology firms and companies that are cyclical in nature and have limited accruals. Given the weaker financials, the cost of foreign funds is likely to be very high for them.

About eight companies, accounting for 17.3 per cent of the outstanding FCCBs, are likely to opt for restructuring through maturity extension.

"The group is characterised by companies that were involved in debt-driven organic or inorganic growth. Taking the median for the group, companies' debt grew by more than 300 per cent," said Fitch.

The earnings before interest, tax, depreciation and amortisation/interest coverage ratio for the group fell drastically, with the median interest coverage ratio declining 82 per cent, it added.

The economic slowdown, or the less-than-expected benefit from acquisitions, resulted in a significantly reduced cash flow, and the equity write-off has wiped out the possibility of raising funds, both in India and abroad.

While these companies have assets in the form of real estate and operational subsidiaries, their sale in the current market conditions is difficult, said the report. Suzlon Energy, Hotel Leela Venture and Moser Baer are some companies that would opt for restructuring by way of increasing the maturity period of bonds.

Seven companies, including GTL Infrastructure, would not be able to repay their FCCB debt easily and would opt for restructuring through distressed debt exchange (DDE) features like reduction in interest, swapping of debt for equity and hybrids.

"The group's debt increased by over 500 per cent (median) from issuance, while the interest coverage fell 96 per cent. Given the weakened credit profile and limited availability of readily saleable assets, restructuring may follow certain features of DDE," said Fitch.

The recovery expectations of FCCB holders may be adversely affected if domestic lenders also consider (for defaults on domestic loans) recovery actions, it added.

About 13 companies are expected to default. These constitute 11 per cent of the outstanding FCCBs this year.

"Given the high likelihood of domestic financial institutions taking legal/recovery action, FCCB holders have limited chances of a substantial recovery, if their FCCBs are not redeemed," Fitch said. Sterling Biotech, 3i infotech and Wanbury are some companies under the default category.

BS Reporter in Mumbai
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