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Struggles ahead for India Inc in convertible bonds

MUMBAI/HONG KONG - India’s Reliance Communications was lucky a China connection meant it could borrow $1.2 billion to refinance a maturing foreign currency convertible bond. Other Indian companies may not be so lucky.

Nearly two dozen Indian firms have an outstanding $5.8 billion in foreign currency convertible bonds (FCCBs) that mature in 2012, brokerage Kotak Securities says. Many will have to redeem the bonds because their share prices have slumped well below the trigger level for converting the bonds to equity.

Top tier borrowers will be able to tap international markets with little fuss and Reliance’s successful refinancing will boost confidence in other big-name Indian companies.

But concerns are growing that a number of firms may struggle or even fail to secure refinancing. Six-month LIBOR, a benchmark for borrowing, has doubled since the middle of last year as worries have grown over the euro area debt crisis.

A 16 percent slump in the rupee in 2011 adds another credit risk and bond buyers and lenders are reducing exposure to riskier markets as fears grow the euro area debt crisis could spark a fresh credit crunch.

“Given its stature, there was never any question about the ability of Reliance Communications to raise funding to meet its convertible bond obligations,” said Pradeep Mohinani, head credit desk analyst at Nomura International in Hong Kong.

“Its success has somewhat reduced the refinancing risk for India Inc. However, there are still several Indian companies that face an uphill task in redeeming their maturing convertible bonds. Some of them might get dollar funding from the loan markets, but the lesser credits will have difficulty in borrowing new money, which could potentially result in defaults.”

State-backed Export Import Bank of India, a frequent borrower in offshore markets, is seeking a $150 million to $250 million, 3-year loan at 250 basis points over six-month LIBOR, Thomson Reuters LPC said. That is nearly double what it paid in March last year, a clear sign of the increase in borrowing costs even for top-tier companies such as Exim India.

“Top-tier Indian firms will have to pay between 250 basis points and 300 basis points over LIBOR to borrow five-year money offshore,” a Hong Kong-based loan banker said.

“Even at that kind of pricing, there isn’t a lot of liquidity available,” he added, pointing to the rising cost of funding and a shrinking pool of capital globally.

With six-month LIBOR at 79 basis points, Exim India’s cost of funding works out at 3.29 percent. Reliance Communications, considered a riskier borrower, is paying 5 percent on a seven-year loan from a group of Chinese banks.

Reliance is expected to buy telecoms equipment from Chinese companies, a condition that helped seal the deal, sources with direct knowledge of the deal said.

Market conditions will be much tougher for smaller or mid-ranking firms, which may have to rely on Indian lenders for funding.

Orchid Chemicals, which has to repay $117 million in outstanding bonds next month, is typical, bankers said. At little over 170 rupees, the company’s share price is nearly half the conversion price for the bond.

Axis Bank has offered Orchid a $100 million loan over six and a half year at 450 bps over six-month LIBOR, a source close to the deal told Thomson Reuters LPC.

Orchid’s all-in cost is likely to be under 6 percent, higher than Reliance’s pricing.

Other issuers may find it difficult to secure fresh funding, which is likely to increase worries about debt defaults, Kotak said.

Kotak highlighted technology services provider Subex, optical media and home entertainment company Moser Baer, and information technology company 3i Infotech as ones with a “high probability of default”.

Yields on their FCCBs have jumped beyond 50 percent as investors have sold off the debt.

Subex intends to raise up to $135 million to refinance two convertible bonds worth a combined $131 million that mature in March.

“We are confident that Subex will not default and expect to complete the entire fund raising by end of February 2012,” Subex founder chairman Subash Menon told Reuters in a statement.

Moser Baer has $88.5 million in FCCBs maturing in two tranches in June, while 3i Infotech has a total of $86.4 million of bonds to redeem this year. Shares of both trade way below their conversion prices.

The companies did not respond to requests for comment.

Indian wind turbine maker Suzlon Energy Ltd has $389 million of FCCBs maturing in 2012 in four separate tranches. The company’s share price is more than 70 percent below the conversion price of the bonds due in June, Thomson Reuters data shows.

Including a redemption premium, Suzlon’s total repayment is likely to be $569 million, and with yields in excess of 40 percent for these tranches the market may be “factoring a risk of restructuring” for the issuer, the Kotak report said.

Suzlon said in a statement it was confident of fulfilling its FCCB obligations as they reach maturity.

Total offshore borrowing for the Indian corporate sector was$173 billion as of June 2011, representing 20 percent of total outstanding loans for the country’s banking sector and 46 percent of total corporate loans, Citigroup said in a report.

Reliance comm deal an outlier?

While most other Indian borrowers may not have the same access to cash-rich Chinese banks as Reliance Communications does, the big-ticket deal relieved some of the pressure as Indian companies competing for scarce offshore finance.

“The refinancing arrangement may stabilise the market sentiment towards Indian companies and boost their access to the capital market,” said Tobias Bettkober, a Switzerland-based fund manager for Holinger Asset Management.

“This was a large FCCB issue and an adverse outcome of this would have been catastrophic,” said Bettkober, who holds Reliance Communications bonds as part of the fund’s portfolio.

The Reliance Communications deal came with strings attached. The company is expected to buy equipment from Chinese companies such as Huawei and ZTE Corp, sources with direct knowledge of the matter said.