Though Indian companies face a mammoth payment of $8.3 billion to international investors who invested in foreign currency convertible bonds (FCCBs) by the end of March 2013, they are unlikely to default. These companies are taking proactive steps to redeem bonds as and when they mature.

Some of the big issuers whose bonds are maturing in coming months include Reliance Communications ($925 million maturing on March 1, 2012) and Jaiprakash Associates ($354 million maturing September 12, 2012). Since their share prices are at a discount to the FCCB price, investors will not convert the bonds to equity shares, and instead ask the companies to redeem the bonds.

“Considering that Reliance Power paid its FCCB obligations ($300 million in October), defaults from the group is unlikely,” said Saifullah Rais of Kotak Institutional Research, in a note dated November 8.

In a separate report, Manishi Raychaudhuri, managing director and head of research at BNP Paribas Securities, said a majority of the companies are not “potential defaulters” though the bond markets seems to be discounting a situation where these companies would “default on their FCCB repayments or force bondholders to accept significant haircut”.

Kotak Institutional Research said it was also “comfortable about” Everest Kanto Cylinder ($35 million), Rolta India ($97 million), Videocon Industries ($196 million) and Firstsource Solutions ($191 million), which will also see their FCCBs maturing in 2012 calendar.

Zenith Infotech recently defaulted on its $33 million FCCB obligation which was due in September, many of the other issuers have been taking “proactive steps” in order to meet upcoming redemptions, according to the Kotak report.

Indian corporate houses have raised debt of $13.6 billion through FCCB route since January 2006 with more than half of the issuance coming between January 2007 and January 2008 ($7.5 billion). While companies in materials and industrials have issued the largest amount of FCCBs, it is interesting to observe that smaller information technology companies raised around $1.8 billion in the same period, Kotak said.

Going forward, outstanding FCCBs will stand at $9.8 billion. Considering the redemption premiums offering by most of these zero-coupon convertibles, the redemption value is estimated to be around $12.2 billion.

“With only 13 out of the 119 securities trading above their conversion price and RBI regulatory prohibitions against reduction of conversion price, the situation is definitely grim,” said the Kotak note.

In August, Firstsource Solutions raised around $180 million from the international loan syndication market in order to refinance its existing term loans while Subex is taking the negotiation route with their creditors (FCCB holders) to roll the maturity period of one of its FCCBs further into the future. Reliance Power’s FCCB principal payment of $299.9 million on the due date shows that “all is not lost” in corporate India and strong companies are still meeting their obligations.

In the case of Fortis Healthcare, GIC picked up 6.24 per cent stake as a result of FCCB conversion worth $100 million.

The Kotak analyst however expressed doubts about Moser Baer’s intention to raise $125 million of fresh FCCBs to refinance previous obligations as its balance sheet is “highly leveraged”.

BNP Paribas’ Raychaudhuri said most companies foresee liquidity problems and restructure their convertible bonds in return for more favourable terms to bondholders, such as higher coupon payments. Tata Steel, for example, rolled over its convertible bond maturing in September 2012 to November 2014 and increased its coupon rate from 1 per cent to 4.5 per cent.

The chances of default were lower because the defaulting companies losses access to international markets. Raychaudhuri, however added that some companies may prefer to default either as a “negotiating tactic” to get bondholders to accept haircuts or because they do not “intend to access international capital markets”.

rajeshabraham@mydigitalfc.com