India Inc’s problems with the falling rupee are getting deeper. With almost $5.2 billion or Rs 28,600 crore (at Rs 55/$) of Foreign Currency Convertible Bonds (FCCBs) due for redemption in 2012-13, close to 50 companies will soon have to honour their commitments, according to a report by IIFL. Most of these bonds were issued in 2005-06.
Companies facing redemptions include Jaiprakash Associates ($524 million), GTL Infrastructure ($321 mn), Sintex Industries ($291 mn), JSW Steel ($392 mn) and Suzlon ($536 mn). These alone cross a total of $2 bn due in FCCB payments in the months to come.
FCCBs are bonds that can be converted into equity at the time of maturity. If the share price of the company is below the price promised at the time of the issue, then the investor can get the bonds redeemed in cash. Some FCCBs promise a return on the amount invested as well. Given that in most of the cases the stock price of these companies have fallen sharply, much below the conversion price, bond holders are likely to opt for redemption. The companies, many of which are already highly leveraged, will come under pressure, having to resort to more borrowings to meet their obligation.
With the economy and profits of companies on a downslide, many of these conversions are likely to face a rocky road. Add currency woes and things look worse. At the time of issuance in 2005-06, the rupee was at Rs 40/$. Since then, the currency has taken a serious knock, falling to Rs 57/$, a 40 per cent drop.
Some defaults have already started. Wockhardt, Zenith Infotech and Pyramid Saimira Theatre Ltd recently defaulted on their FCCB redemptions. Later, Wockhardt filed a consent decree in the Bombay high court and agreed to pay their FCCB holders. The company has been depositing the instalments with the court.
Standard & Poor’s, in a recent report, warned that almost half of the 48 companies whose FCCBs were up for maturity in the current year might go for restructuring or even default on the payments. It estimates 28 firms might go for restructuring of the debt, which will increase their interest expenses by an average of 25 per cent.
According to a June 5 report by Nemkumar and Gopal Ritolia of IIFL Cap, the FCCB debt comes at 12-15 per cent at current exchange rates. The report said, “The sharp rupee depreciation has pushed the conversion threshold even higher and has added 700 basis points to the original cost of debt. An instrument meant as a cheap cost of finance has turned out to be costlier than the domestic cost of debt.”
Tata Steel and JP Associates had issued bonds with yield-to-maturity of 5.3 per cent and 8.1 per cent, which at maturity in the current year will be 12 per cent and 15 per cent, respectively, due to the rupee’s fall.
| LARGE FCCBS DUE FOR CONVERSION | ||||
| Issuer | Redemption date | Redemption value ($ mn) | Conversion price at current exchange rate (Rs/share) | Current market price (Rs/share) |
| Tata Motors | Jul 12, ‘12 | 624 | 323 | 247 |
| JP Associates | Sep 12, ‘12 | 524 | 333 | 71 |
| Tata Steel | Sep 5, ‘12 | 471 | 1,230 | 411 |
| JSW Steel | Jun 28, ‘12 | 392 | 1,858 | 648 |
| Suzlon Energy | Oct 11, ‘12 | 176 | 192 | 18 |
| GTL Infra | Nov 29, ‘12 | 321 | 102 | 8 |
| Sintex Industries | Mar 13, ‘13 | 291 | 435 | 59 |
| Firstsource Sol | Dec 4, ‘12 | 240 | 176 | 9 |
| Strides Arcolab | Jun 27, ‘12 | 116 | 914 | 719 |
| Plethico Pharma | Oct 23, ‘12 | 109 | 964 | 365 |
| Suzlon conversion price ranges Rs 157-193; Source: Bloomberg and IIFL research based on Rs /$ at 55 | ||||
However, replacing FCCBs with other debt might cause a problem of a different kind. Though the accounting system in India does not require companies to account for FCCB interest costs on an accrual basis, for simpler debts the companies will have to account for the interest costs and that will hit the profit and loss accounts. According to Bloomberg and IIFL Research, JP Associates could end up with an additional interest of Rs 345.6 crore, which will impact the earnings per share of FY14 by 22.9 per cent.
Also, the redemption premium can be directly adjusted against the reserves’ accounts in the balance sheets. This means the debt-to-equity ratios of companies will rise, as adjusting the redemption money against the shareholders’ funds means the latter, or the reserves account, will go down by a similar amount.
Suzlon Energy, which already has a high 2.11 debt-equity ratio, will further go up to 2.47 once the redemption premium is adjusted against reserves. The same for JSW Steel will go up to 1.03 from 0.95 currently.
