Half of maturing FCCBs in 2012 may be restructured: S&P

The international ratings agency Standard and Poor's today said that about half of the 48 companies that have Foreign Currency Convertible Bonds (FCCBs) maturing in the rest of 2012 may go for restructuring. It says refinancing would be difficult in current market conditions and investors may not opt to take the judicial route for recoveries in case of defaults.

While only five of such companies are place well enough to pay off their FCCB debt, about 28 others will have to roll over the bonds with higher coupons or lower the conversion-to-equity price or get bondholders to accept only a partial repayment of their principal. "Companies will find themselves in a fix because of a tepid global economy. This has slowed their revenue and profit growth, dragged down their stock prices and left them less able to service debt," said Vishal Kulkarni, credit analyst at S&P.

S&P's said that rupee depreciation has added to the woes. Most of the FCCBs that mature in 2012 were issued in 2007-08, when the rupee was at about Rs 42 per dollar. The rupee has lost more than 30% against the greenback since then. "This would add about $2 billion to the value of FCCB maturities in 2012," said the ratings agency. 

Companies may have to shell out additional interest of $700 million a year in case they manage to refinance the $5 billion of FCCB debt maturing in 2012. The Reserve Bank of India (RBI) has allowed companies to take the external commercial borrowing route to redeem FCCBs. However, the maximum interest rate allowed on such borrowings is LIBOR plus 500 bps. "However, this option is available only to companies with strong credit profiles. Moreover, overseas branches of Indian bank provide most such loans and could be constrained by their sometimes limited access to dollars," said analysts at S&P in the report.

Loans from Chinese banks could come to rescue but only for companies in the power and infrastructure related sectors that have import-related relationships with country's manufacturing companies.

Another option of lowering the conversion price will result in more shares to be given to FCCB holders but the equity dilution would be higher for existing shareholders and the share price could therefore fall. Also. resetting the conversion price needs approval from the RBI.

S&P said that many companies are in talks with bondholders to roll over maturing FCCBs with revised terms, and with banks to refinance the bonds.