Companies looking to repay foreign currency convertible bonds will see their interest expenses rise 25 percent on average due to higher refinancing cost, Standard & Poor's said, amid risk aversion globally and a sharp fall in the rupee.
Several companies had issued foreign currency convertible bonds (FCCBs) at zero or very low coupons about five years ago counting on a booming stock market and risk-on appetite.
However, the recent sharp downturn in the Indian stock market along with the rupee slide eroded expectations of gains on such issuances, sending companies scrambling for funds to meet repayment obligations.
S&P estimates the cost of raising funds through external commercial borrowings will be about 6 percent, while it will be 10-12 percent from domestic banks. Both options are much higher than the cost of FCCB issuance.
"On an aggregate basis, we estimate that FCCB issuers will have to pay $700 million a year in additional interest - if they can refinance their FCCBs maturing in 2012," S&P said.
The agency estimates only five of 48 companies with FCCB repayments due in the remainder of 2012 will be able to pay off their debt, while 28 companies will have to recast their debt in the absence of suitable refinance options.
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"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," it said.
S&P expects companies to stay away from issuing such zero-coupon FCCBs with high conversion premiums as appetite for risky assets has soured globally, while the rupee slumped.
"Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about 42 to the dollar. The rupee has now plummeted more than 30 percent...This would add about 100 billion rupees to the value of FCCB maturities in 2012," S&P said.
The rupee touched a life-low of 56.55 to the dollar on Thursday, within three weeks of its previous record low of 56.52. (Reporting by Suvashree Dey Choudhury; Editing by Aradhana Aravindan)