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Convertible debt sales in India have halted, as investors shun the notes in Asia's worst-performing stock market, with defaults extending 2012's record.
Issuance of bonds that can be exchanged for shares was zero in 2013, compared with $600 million in 2012 and a record $7.5 billion in 2007, according to data compiled by Bloomberg. That's the slowest start since 2000, the data show. Convertibles returned 0.27 per cent last quarter, the worst performance in the Asia-Pacific after Singapore's 0.8 per cent loss, Barclays Plc indexes show. The region's average return was 3.8 per cent.
"Convertibles are generally issued in bull markets, when there is lot of appetite for equities," U R Bhat, director at Dalton Capital Advisors India Pvt in Mumbai, said last week. "There is no appetite now. Investors are not optimistic about the equity markets because the economic indicators are not good."
Three Indian issuers of exchangeable debt defaulted on $241 million so far this year, adding to a record $619 million of non-payments in 2012 that were led by wind-turbine maker Suzlon Energy Ltd. The benchmark S&P BSE Sensex Index of shares slumped 6.3 per cent in 2013, while the MSCI Asia-Pacific index gained 5.7 per cent, as brokerages forecast falling earnings in the past quarter amid the slowest annual economic growth in a decade.
India's biggest companies are poised to report the first decline in quarterly earnings in three years. Net incomes for the 30 members of the Sensex might fall 0.8 per cent from a year ago in the three months ended March 31, according to estimates compiled by Bloomberg. Kotak Institutional Equities and Religare Capital Markets are among brokerages cutting forecasts.
Emerging uncertainties
The rupee weakened about six per cent to 54.7650 a dollar in the past 12 months, as India's current-account deficit swelled to a record. The shortfall in the widest measure of trade was $32.6 billion in the quarter ended December 31, or 6.7 per cent of GDP. The currency fell 0.4 per cent today.
The ruling United Progressive Alliance-II government is 44 seats short of majority after a key ally, DMK, pulled out of the coalition last month. This will make it difficult for the government to push through key reforms needed to boost growth.
"We're not seeing any great recovery in the economy or signs of earnings upgrades," Sanjeev Prasad, senior executive director at Kotak Institutional Equities, told Bloomberg TV India on April 8.
Debt issuance
Indian companies sold $16.8 billion of convertibles from 2005 to 2007, when the Sensex index more than doubled in value and GDP grew more than nine per cent annually. International equity-linked debt sales touched a two-year high at $26.3 billion last quarter, according to data compiled by Bloomberg. Ninety nine companies sold exchangeable debt in the period, the data show.
Bartronics India, Geodesic and Vardhman Polytex failed to repay convertibles in the last quarter, according to data compiled by Bloomberg.
The local convertible market's collapse contrasts with a record start to the year for sales of coupon-paying dollar notes. Issuers, including Bharti Airtel Ltd and Reliance Industries Ltd (RIL), raised $6.3 billion abroad in the three months ended March 31, the data show. State Bank of India, the nation's largest lender by assets, raised $1 billion of five-year notes at a coupon of 3.25 per cent April 11.
Average dollar yields for local companies fell 30 basis points this year, and touched an all-time low of 3.81 per cent on March 18, according to HSBC Holdings Plc indexes. Falling yields have also boosted sales of rupee-denominated debt to an all-time high. Local-currency issuance jumped 15 per cent to Rs 73,700 crore ($13.5 billion) last quarter from the preceding three months.
Sovereign Yield
The yield on 10-year government bonds declined nine basis points last quarter, offering an extra 613 basis points over US Treasuries, data compiled by Bloomberg show. The rate on the benchmark 8.15 per cent notes due June 2022 fell 2 basis points to 7.85 per cent.
The cost of insuring the debt of State Bank of India, considered a proxy for the sovereign by some investors, using five-year credit-default swaps slid 21 basis points this year to 205, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
"Convertibles are not being sold as investors prefer coupon-paying bonds," Hemant Dharnidharka, the head of credit research at SJS Markets Ltd. in Bangalore, said in an April 10 telephone interview. "It serves the company's interest to sell bonds that pay a coupon, rather than convertibles, as they face no equity dilution on maturity. Most of the convertibles that are maturing since last year were issued when the companies were not ready to pay an upfront coupon every year, and this debt had a redemption price of 1.3 to 1.4 times the face value."
Bharat, Gitanjali
Bharat Forge is among three local companies that need to redeem $90 million of convertibles by the end of the year, according to Bloomberg-compiled data. Outstanding convertible debt declined 44 per cent in 2012 as $4.7 billion matured or was reorganised, the data show. Another $4.7 billion of notes are due for repayment by the end of this decade.
Gitanjali Gems, the owner of jewelry brands Nakshatra, Gili and Asmi, deferred plans to sell convertibles, the company said in an exchange filing March 26. The Mumbai-based company had planned to sell equity-linked notes maturing 2018.
"Fund managers are bleeding on exposure to Indian convertibles and sentiment is very unfavorable because of the defaults," Raj Kothari, a London-based fixed-income trader at Sun Global Investment, said in an April 9 telephone interview. "Unless the blue chip companies sell bonds, a revival of the convertible bond market will be tough."
