Falling Re to hit firms faced with forex bonds repayments

Indian firms which have not shielded themselves against an unprecedented slide in the rupee against the dollar, will soon be staring at a huge dent in their balance sheets. The sharp depreciation in the domestic currency is likely to increase their debt burden, as they will have to shell out more to their foreign currency convertible bond (FCCB) holders.

According to Bloomberg data, compiled by BS Research Bureau, dollar-denominated FCCBs to the tune of $8 billion are due for maturity in the next six months.

FCCBs issued by companies including Suzlon Energy, Moser Baer, JSW Steel, Rolta India, Pyramid Saimira, Subex and Tata Motors are set to mature in the next two months.

“The scale and the rapidity of the rupee depreciation would have caught many companies off guard,” said Saurabh Mukherjea, head of equities, Ambit Capital. He adds the drop in the rupee will have a two-layered impact on companies facing FCCB redemptions.

FCCBs MATURING IN COMING MONTHS
Name	Maturity	Outstanding amount ($ mn)	Conversion price (In $)	Price in Rs on BSE
Tata Motors	Jul 12,’12	473.0	4.5	267.0
Tata Steel	Sep 05,’12	382.0	18.1	398.6
Jaiprakash Asso	Sep 12,’12	354.5	4.1	59.8
JSW Steel	Jun 28,’12	274.4	23.7	595.6
GTL Infrastructrure	Nov 29,’12	228.3	1.3	8.2
Suzlon Energy	Jun 12,’12	211.3	2.2	20.9
Firstsource	Dec 04,’12	172.3	2.4	8.4
Suzlon Energy	Oct 11,’12	121.4	2.2	20.9
Tulip IT Srvcs	Aug 26,’12	97.0	5.6	75.7
Rolta India	Jun 29,’12	96.7	9.0	73.5
Strides Arcolab	Jun 27,’12	80.0	11.3	678.9
Educomp Solution	Jul 26,’12	78.5	14.5	144.0
The list is representative, not comprehensive Source: Bloomberg; Compiled by BS Research Bureau

“The optical impact will be on their profit and loss account due to the mark-to-market losses. The second would be that the debt burden will increase and interest coverage ratio will take a hit, which is a profound worry,” added Mukherjea.

Experts said large companies typically hedge their dollar exposure but it’s possible they might not have hedged adequately this time around, given the sharp movement in the domestic currency.

The Indian currency, which last closed at 55.65 against the US dollar on Thursday, has fallen over 14 per cent from its 2012 high of 48.69 on February 3.

“FCCB redemption is a huge burden when the rupee is depreciating. There is hope that measures taken by the Reserve Bank of India will help the rupee recover some of its losses. If the rupee scales back to 52 levels it will be a big relief for FCCB holders,” said Hariprasad, head of treasury at Centrum Direct.

FCCBs are debt instruments issued in a currency different from the issuer’s domestic currency. Like any other bond, investors in this type of bonds get regular coupon (interest) and principal payments. However, the difference is that FCCB holders also have an option to convert their bonds into stocks at a pre-determined price (known as conversion price) at a future date.

“A sharp depreciation of the rupee is a concern for companies which are due to redeem their bonds in the next few months. However, recent trends in redemptions of FCCB indicate it is more about the company’s willingness to redeem the bonds, than about the capacity to do so,” said Prashant Sawant, an analyst at London-based KNG Securities LLP. “FCCB-issuing companies have applied to RBI to restructure the bonds. This trend is widely seen in mid-cap companies. Lack of willingness to reach bondholders to provide true and correct picture of the financials of the company is hampering the overall investment sentiments towards Indian FCCB market.”

FCCBs of several Indian companies, maturing in the next few months are unlikely to be converted into equity shares by holders of these bonds as stock prices of these firms are quoting an average 60 per cent below their conversion prices.

FCCBs were extremely popular during the bull market in 2006 and 2007, both among investors and issuers, because of their low coupon rates and high conversion prices. However, issuance of these instruments has witnessed a sharp decline since the global financial crisis in 2008.