India Ratings: Rising Pressure on Corporates for FCCB Redemption, Low Recovery Expected
India Ratings-Mumbai-8 November 2012: India Ratings says that of the USD1.5bn worth of foreign currency convertible bonds (FCCBs) due for redemption for the rest of FY13, around 67% are expected to either default or restructure.
In an update to its special report “Indian FCCB Redemptions in 2012”, dated February 2012, India Ratings says that the FCCB redemption performance till date is broadly in line with its initial expectation. Of the USD6bn FCCBs belonging to 45 companies due between 1 March 2012 and 15 October 2012, around 66.5% of the outstanding FCCBs comprising 19 companies were redeemed on time compared to an India Ratings’ estimate of 70%. Additionally, three companies (8.9% of FCCBs due) redeemed their dues fully, however, within two months after the due date.
Most of the companies refinanced their FCCBs either through foreign or domestic debt or through issuance of fresh FCCBs. Only five companies have used any internal accruals to redeem FCCBs. India Ratings expects the interest coverage ratios of the companies who used debt to refinance FCCBs to deteriorate by 15%-25% from the current levels.
Of the 26 companies who had defaulted on FCCBs on due date, three companies redeemed FCCBs post due date through cash while investors in four companies converted FCCB into equity at a conversion price much lower than the original conversion price. Redemption still is due for 19 companies which had defaulted on FCCBs. Such obligations are around 21.4% of the total redemption value between 1 March 2012 and 15 October 2012.
For these 19 defaulted/restructured FCCB cases, India Ratings has estimated recovery rates and potential time to recovery considering contractual and structural subordination, expected liquidation value, economic motivation of sponsor and operational viability of the underlying business. FCCB holders in 12 companies may expect below-average recoveries in the range of 0%-30% with an average recovery span of at least five years. Of these 12 companies, six companies or their subsidiaries went under corporate debt restructuring and six defaulted on their local currency obligations. For the remaining seven companies, India Ratings expects above-average recovery of 30%-70% with an average recovery span of three to five years.
A full report, “Update of Indian FCCB Redemption, FY13: Redemption Stress Expected to Aggravate”, is available at www.indiaratings.co.in.
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