GTL Infra, Subex, Zenith to default on FCCB payments?

As many as 19 companies are likely to default on paying their foreign currency convertible bonds (FCCBs) when they come up for redemption in 2012. In fact, one-fifth of India Inc’s total FCCBs valued at $7 billion due for redemption this year are likely to face the threat of default, says Fitch Ratings.

That’s not all: an additional 17 percent of FCCBs could be restructured as most companies do not have the financial strength to settle the debts now.

FCCBs are bonds that can be converted into equity after a specified maturity period if the current stock price is above a pre-decided price level. Since most company shares are trading below these price levels, bond holders will be unwilling to convert their bonds into equity. That means borrowing companies will just have to repay those bonds, which many of them can’t.

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[caption id=“attachment_223026” align=“alignleft” width=“380” caption=“FCCBs are bonds that can be converted into equity after a specified maturity period if the current stock price is above a pre-decided price level. Reuters”]  [/caption]

Fitch’s report names 19 companies that are big trouble because of FCCBs, according to _ Economic Times:_GTL Infrastructure, Subex, XL Energy, Gayatri Projects, Indowind Energy, Pokarna, Murli Industries, Sterling Biotech, Pyramid Saimira Theatre, KSL & Industries, 3i Infotech, Zenith Infotech,ICSA India, KLG Systel,Ankur Drugs & Pharma, Gemini Communications,Pioneer Embroideries, GV Films, andWanbury.

Take Subex, for example. Its foreign bonds will mature on 9 March, but the company is in no position to meet its commitments. A Kotak report said the company plans to negotiate with creditors to extend the bonds’ maturity date to 9 July.

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Fitch Ratings has studied a total of 59 companies whose FCCBs are to be redeemed this year. It divides them into four groups: those who will make the payments, likely to restructure, likely torestructurewith more distressed debt and likely to default.

Among the 31 companies likely to redeem their bonds, only five are better positioned than the rest. They areReliance Communications, Tata Motors, Tata Steel, JSW Steel and Bharat Forge, which constitute 38 percent of total FCCBs. In fact, Reliance Communications recentlyannounced that it had arranged for $1.18 billion through a consortium of Chinese banks to repay its FCCBs.

A few other companies, likeSuzlon Energy, Firstsource Solutions, Prime Focus, Prithvi Information Solutions, Moser Baer India, Hotel Leela Venture and Shree Ashtavinayak, will look at restructuring their debts as they will not be able to make payments immediately. These face stressed balance sheets and cash flows, the report said.

The third category of borrowers includes those who will restructure their FCCBs but fall into deeper troublebecause of that. They areGTL Infrastructure, Subex, XL Energy, Gayatri Projects, Indowind Energy, Pokarna and Murli Industries. This group can practically be clubbed with the last group, comprising companies that are likely to default. Some of these companies have already defaulted in other debt obligations, said Fitch. So, restructured debt, which could take place at higher costs, could push some of these companies into bigger problems.