Rating agency Standard & Poor's has said in its latest report that as many as half of the 48 companies with Foreign Currency Convertible Bonds (FCCBs) maturing in the rest of 2012 may default due to the slump in the Indian stock markets and the rupee.
According to the report, $5 billion worth of FCCBs are expected to mature during the rest of the year. "With India's stock market still in a slump, investors don't want to convert the US$5 billion in FCCBs that will mature in the rest of 2012 into stock that's worth 20 percent- 90 percent less than the conversion price. Instead, they want their money," S&P said.
It further added that the steep 30 percent drop in the value of the Indian rupee against the US dollar over past two years is exacerbating the problem. The result is that many FCCB issuers may have trouble finding funds to repay bondholders and that those that can't will face payment default.
This has already affected companies like Wockhardt Ltd, Cranes Software International, Aftek, JCT Ltd, Venus Remedies, Marksans Pharma, Mascon Global, Gremach Infrastructure Equipments And Projects , Pyramid Saimira Theatre , and Zenith Infotech as they have defaulted.
Further, for companies that are looking to redeem the bonds and can get funding, their interest cost will rise by 25 percent on average. Another option that they could look at are loans from Chinese banks. Reliance Communications borrowed $1.18 billion from Chinese banks at an interest rate of about 5 percent. Companies in the power and other infrastructure related sectors that have an import relation with China's manufacturing companies are more likely to get these loans.
During the stock market boom of 2006-2008, Indian companies borrowed via the FCCB route as this helped them get low cost foreign currency loans which they could use for overseas acquisition or expansion. At that time, investors expected the stock markets to rise and the price of the companies stock to exceed the conversion price when the bonds matured. However, trouble started during the 2008 financial crisis as the world went into a recession and global stocks plummeted.
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Updated Date: Dec 20, 2014 09:34:20 IST