20% of FCCBs due for redemption likely to default in 2012

About one-fifth of the $7 billion worth FCCBs issued by Indian companies that are due for redemption in 2012 have an "extremely
high likelihood" of default, credit ratings agency Fitch has said.

In a report 'Indian FCCB Redemption in 2012: Quantifying the Problem' released today, Fitch also said that another 17% of the FCCBs due this year are likely to undergo restructuring.

"... 20% of India's estimated $7 billion FCCBs due for redemption in 2012 have an extremely high likelihood of default. Another 17% of the FCCBs due this year are likely to undergo restructuring, mostly maturity extensions," it said.

Fitch said that the rest 63% of FCCBs due in 2012 have a high likelihood of redemption.

The agency's report is based on an analysis of 59 companies whose FCCBs are due for redemption in 2012.

FCCB's are a special category of bonds which are issued in currencies different from the domestic currency issuing company's. Corporates issue FCCB's to raise money in foreign currencies.

According to the report, 19 of the companies have a high likelihood of default on their FCCB payments or restructuring the FCCBs with significant distressed debt features.

"In this group, at least eight have already defaulted in other debt obligations. Given their significantly weakened cash flow, unsustainable debt levels and existing default status, the prospect of recovery actions by domestic lenders against a number of these companies is high," Fitch said.

It added that in the event of default on FCCB payment, the recovery may be low given their unsecured nature.

Besides, nine other companies have been put in the list of 'likely to restructure' group which, despite having a reasonable business model, are currently experiencing stretched liquidity and stressed cash flows.

"The ultimate FCCB payment [of these companies] is likely to be driven by the sale of identifiable, non-encumbered assets. Such FCCBs have a high likelihood of undergoing restructuring involving a maturity extension but are unlikely to have significant distressed debt exchange features," Fitch said said.

Other 31 corporates studied by the agency were in the 'likely to redeem' category.

"... Five [among the 31] are better placed to redeem their FCCBs using a financing option of their choice. While the remaining 26 companies had a relatively weaker financial profile, they would still be able to access low-cost ECB funding or even high-cost domestic debt," the report said.