Failing convertible-bond repayments

Convertible bonds were India Inc's favourite a decade ago. But recently, defaults are taking place. Some points about foreign currency convertible bonds:

What is FCCB?

FCCB is a convertible bond issued in a currency, different than the issuer's domestic one. It is a mix of debt and equity instruments. An FCCB makes regular coupon and principal payments but can also convert into stock.

Why were FCCBs popular among Indian companies?

According to industry analysts, FCCBs offered Indian corporate groups an opportunity to raise money at cheaper rates and prompted many of them to avail this route for meeting their funding requirements. It also helped domestic companies improve their brand visibility globally.

What went wrong?

Companies claimed that the uncertain macro-economic environment following the global financial crisis in 2008-09 stressed their earnings, limiting their repayment capacity. Analysts also felt that overleveraging by some of these companies landed them in trouble. Jaiprakash Power, for instance, said that the crisis in the power sector affected its earnings and the revenues generated from its power projects, and existing cash balances were not sufficient to repay the FCCBs worth $200 million.

Is restructuring an option?

Experts said companies could request investors for more time to repay the dues. Investors may agree if they feel confident of getting back their money. But typically, they will ask for a higher coupon rate. Jaiprakash Power was confident of its ability to repay the dues on or before March 31, 2016. The company will negotiate with investors on Monday in Hong Kong.

Will banks help?

Indian banks have helped issuers by offering them loans to meet their FCCB repayment obligations. But analysts believe that with asset quality concerns rising in the recent past, lenders will be risk-averse and stay away from such financing. Bankers said financing will depend on a viable turnaround plan and the willingness of the promoter to contribute fresh capital.

Will investors agree for conversion into equity?

Theoretically, investors can convert the bonds into shares. But experience suggests that in most cases FCCBs don't get converted, because the conversion price is generally higher than the market price.

What steps can investors take?

If the issuer defaults, bondholders can move the court. Investors can also file winding-up petitions if the company does not repay their dues. Analysts say that such petitions are often filed to force the issuer on agreeing to the restructuring terms of the investors.

What are the implications for the company?

Analysts say if a company defaults on FCCBs, it faces a ratings downgrade. Also, it will be difficult for the issuer to raise money from markets abroad.

A look at the recent repayment woes

2009: Wockhardt defaulted on a repayment of $110-million FCCBs

September, 2011: Zenith Infotech defaulted on a repayment of FCCBs

May, 2012: Sterling Biotech defaulted on a $184-million repayment to convertible bondholders

October, 2012: Suzlon Energy defaulted on a $200-million convertible bond redemption

January, 2015: Jaiprakash Power expressed its inability to fulfil an FCCB repayment obligation in time