Jaiprakash Power resurrects ghost of past defaults in convertible bonds

The spectre of past defaults has come to the fore with Jaiprakash Power Ventures, informing stock exchanges on Wednesday about its inability to fulfil its repayment obligation to holders of foreign currency convertible bonds (FCCBs) on time.

While the repayment is due on February 13 this year, the company has expressed its desire to engage in discussions with bondholders for a revised payment schedule and invited them for negotiations on Monday in Hong Kong. Jaiprakash Power Ventures has also clarified that it is confident of its ability to repay the dues on or before March 31, 2016.

"Many companies are still experiencing financial distress despite de-leveraging their balance sheets. While the sentiment has turned positive, companies are still struggling to improve their finances. Hence, there is still a risk of default and the need for restructuring foreign as well as domestic borrowings is likely to continue," said Dhananjay Sinha, head of institutional research, economist and strategist at Emkay Global Financial Services.

Jaiprakash Power Ventures will not be the first Indian company to default on repayment of convertible bonds. Suzlon Energy, Wockhardt, Sterling Biotech and Zenith Infotech have defaulted on convertible bonds and rescheduled repayments.

According to industry experts, over-leveraging weak finances and unfavourable macroeconomic environments are often responsible for such defaults. Jaiprakash Power Ventures, for instance, said the crisis in the power sector had impacted its earnings, and the revenues generated from its power projects and existing cash balances was not sufficient to repay the FCCBs worth $200 million.

Analysts are of the opinion that now, it is difficult for companies to borrow money from banks to meet their convertible bonds' repayment obligations. Many Indian companies had raised new loans to repay FCCBs. According to reports, 19 Indian firms had repaid FCCBs between March and mid-October 2012. Of these, 14 had used new loans or fresh FCCBs to repay the bonds.

"Now, there is risk aversion among banks and not many are willing to make refinancing offers," said Nirmal Gangwal, founder and chief executive officer of Brescon Corporate Advisors, an independent financial advisory firm.

Bankers say refinancing depends on a viable turnaround plan and willingness of the promoter to contribute fresh capital. "If the promoter himself is not willing to infuse capital, banks will be reluctant," said a banker heading the treasury operations of a private bank.

A company defaulting on repayment of convertible bonds is also subjected to rating downgrades and uncertainty remains on its ability to raise money from foreign markets.

According to analysts, if a company seeks additional time to repay FCCBs, investors will typically ask for a higher coupon rate. Jaiprakash Power Ventures' FCCBs are carrying a coupon rate of five per cent. Conversion into equity is also an option, theoretically. But most analysts believe investors and issuers do not often agree on the conversion price.

However, some bankers and industry analysts appear confident that Jaiprakash Power Ventures' case is a stray example. "Indian companies are hardly raising money through FCCBs. So, there is no risk of widespread defaults happening. Also, we believe this is a company specific issue and not a systemic problem," said a banker in charge of debt capital markets of a foreign bank in India.

INDIA INC'S REPAYMENT WOES IN CONVERTIBLE BONDS:

• January, 2015: Jaiprakash Power expresses its inability to fulfil FCCB repayment obligation on time
   
• October, 2012: Suzlon Energy defaults on $200-million convertible bond redemption
   
• May, 2012: Sterling Biotech defaults on $184-million repayment to convertible bondholders
   
• September, 2011: Zenith Infotech defaults on repayment of FCCBs
   
• 2009: Wockhardt defaults on repayment of $110-million FCCBs