Business Standard / New Delhi
The pressure to redeem foreign-currency bonds makes 2012 a difficult year for India Inc.
During the era of unprecedented liquidity that preceded the financial crisis of 2008, India Inc developed an appetite for hard currency. It was, after all, the easiest way to fuel global aspirations. Interest rate differentials were favourable; and the rupee was relatively stable if not gaining in strength, making the currency risk seem manageable.
A bull run on Dalal Street meant that foreign currency convertible bonds, or FCCBs, in which the creditor may convert the loan to equity at an agreed price on a given date, were lapped up — as was straightforward external commercial borrowing, or ECB.
At the end of November 2011, ECB outstanding amounted to $103 billion, about 30 per cent of all external debt; FCCBs outstanding are perhaps $24 billion (the redemption value of FCCBs can differ substantially from issue size).
Meanwhile, the pre-2008 equations have been turned upside down. Instead of saving, say, six per cent per annum on interest rates, companies with ECB exposure are struggling with 22 per cent rupee depreciation.
And, in the wake of a bear market, corporations with maturing FCCBs are grimly aware they may have to redeem those bonds for expensive cash, instead of paying in shares.
Both FCCB redemption pressure and ECB debt-servicing commitments will be serious issues in 2012. Worse, quite a few affected companies are stretched in terms of their ability to raise rupee debt, with their promoters having already pledged substantial stakes.
An advisory by India Infoline says $7.8 billion (redemption value) of FCCBs are due for redemption or conversion by December 2012. The bulk will probably have to be redeemed. The list of FCCB issuers with bonds due in 2012 includes many erstwhile darlings of the stock market. Unfortunately, the downturn has triggered big falls in their market value. Pulling share prices up to conversion levels would require a rally of very unlikely dimensions.
For instance, it is unlikely that creditors holding $1.18 billion of FCCBs in Reliance Communication will convert to equity at Rs 661 a share when the company’s prevailing market price is Rs 73. Similarly, Suzlon Energy will have to raise $484 million unless bondholders are willing to pay Rs 97 for a share trading at Rs 18. JP Associates, Tata Steel, JSW Steel, Sterling Biotech, Orchid Chemicals and many others face similar conundrums.
Rupee refinancing will be high-cost in many cases. The favourable interest differential evaporates, and currency depreciation looms. Companies like Suzlon, where the promoter has already pledged 70 per cent of shareholding, will additionally have trouble even accessing rupee debt.
Hybrids like FCCBs are not clearly marked on balance sheets; most, if not all, companies with redemptions due in 2012 have avoided charging costs to the profit and loss account, thereby overstating profits.
The smart money knows this; the market may thus be merciless even if fancy accounting allows redemption impact to be kept off the accounts. Both the Reserve Bank of India and the Securities and Exchange Board of India should be alert to the possibility that refinancing and redemption pressures could transform a tight corporate liquidity situation into a larger, macroeconomic problem.
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