Chinese Century
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Indian companies are coming under significant financial pressure as a result of weakness in the rupee, which is hampering their ability to service foreign currency debt, Standard & Poors (S&P) warned on Thursday.
According to the ratings agency, half of the 48 companies in India with foreign currency convertible bonds (FCCBs) maturing this year, could default on their payments. FCCBs worth $5 billion are due for redemption between now and December.
These bonds, which give investors the option to convert into equity shares at a pre-determined price were viewed as a convenient and cheap source of funding for Indian corporates in recent years.
They allowed firms to borrow with coupon rates as low as zero percent. For some Indian companies, issuing foreign currency convertible bonds during the stock market boom seemed like a bright idea. But its now running into a nightmare, Vishal Kulkarni, primary credit analyst at S&P, said in a report on Thursday.
With the stock market down 9 percent from its peak in February, and many shares seeing much larger drops, investors will be reluctant to convert their bonds into stock, forcing companies to come up with cash to return to bondholders.
Investors dont want to convert the FCCBs into stock thats worth 20-90 percent less than the conversion price, Kulkarni said.
But paying cash back to bondholders could prove challenging for the companies since the rupee has tumbled 25.8 percent against the greenback over the past year.
Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about 42 to the U.S. dollar. The rupee has now plummeted more than 30 percent, he added. The rupee touched a fresh record low of 56.52 against the dollar during Thursdays trading session.
According to S&P, the 24 companies at risk of defaulting on their debt payments include telecom infrastructure firm GTL Infrastructure, Sterling Biotech, textiles company KSL and Industries and entertainment group Pyramid Saimira Theatre, with debt payments ranging from $110-320 million this year.
On top of the depreciation in the rupee and a slump in the stock markets, companies are also seeing slower revenue and profit growth due to the overall weakness in the global economy, he said.
In order to avoid defaulting on their payments, firms would need to restructure their bonds or find alternate sources of funding.
Kulkarni says this will prove to be a huge financial burden for companies without strong credit profiles.
We estimate that interest expenses will rise by 25 percent, on average, for companies that can find funding to pay off FCCBs, he said.
He believes that loans from Chinese banks could become an attractive funding source for Indian companies, given the lower cost of borrowing from China.
Reliance Communications, a broadband and telecommunications firm, borrowed $1.18 billion from Chinese banks at an interest rate of about 5 percent in January this year and was able to pay back its foreign currency debt in March, providing one silver lining for the FCCB market.
http://www.cnbc.com/id/47900564
india is heading the way of zimbabwe. currency collapse and hyperinflation.
According to the ratings agency, half of the 48 companies in India with foreign currency convertible bonds (FCCBs) maturing this year, could default on their payments. FCCBs worth $5 billion are due for redemption between now and December.
These bonds, which give investors the option to convert into equity shares at a pre-determined price were viewed as a convenient and cheap source of funding for Indian corporates in recent years.
They allowed firms to borrow with coupon rates as low as zero percent. For some Indian companies, issuing foreign currency convertible bonds during the stock market boom seemed like a bright idea. But its now running into a nightmare, Vishal Kulkarni, primary credit analyst at S&P, said in a report on Thursday.
With the stock market down 9 percent from its peak in February, and many shares seeing much larger drops, investors will be reluctant to convert their bonds into stock, forcing companies to come up with cash to return to bondholders.
Investors dont want to convert the FCCBs into stock thats worth 20-90 percent less than the conversion price, Kulkarni said.
But paying cash back to bondholders could prove challenging for the companies since the rupee has tumbled 25.8 percent against the greenback over the past year.
Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about 42 to the U.S. dollar. The rupee has now plummeted more than 30 percent, he added. The rupee touched a fresh record low of 56.52 against the dollar during Thursdays trading session.
According to S&P, the 24 companies at risk of defaulting on their debt payments include telecom infrastructure firm GTL Infrastructure, Sterling Biotech, textiles company KSL and Industries and entertainment group Pyramid Saimira Theatre, with debt payments ranging from $110-320 million this year.
On top of the depreciation in the rupee and a slump in the stock markets, companies are also seeing slower revenue and profit growth due to the overall weakness in the global economy, he said.
In order to avoid defaulting on their payments, firms would need to restructure their bonds or find alternate sources of funding.
Kulkarni says this will prove to be a huge financial burden for companies without strong credit profiles.
We estimate that interest expenses will rise by 25 percent, on average, for companies that can find funding to pay off FCCBs, he said.
He believes that loans from Chinese banks could become an attractive funding source for Indian companies, given the lower cost of borrowing from China.
Reliance Communications, a broadband and telecommunications firm, borrowed $1.18 billion from Chinese banks at an interest rate of about 5 percent in January this year and was able to pay back its foreign currency debt in March, providing one silver lining for the FCCB market.
http://www.cnbc.com/id/47900564
india is heading the way of zimbabwe. currency collapse and hyperinflation.
