Signs of life?

IFR India Special Report 2011
6 min read

Foreign investors remain highly sceptical of Indian convertible bonds after a number of 2006–07 deals ran into trouble. Yet, faced with huge redemptions in the coming 12 months, Indian issuers may be forced to reconsider issuing equity-linked instruments.

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Over Rs315bn (US$6.8bn) of foreign currency convertible bonds are set to mature by March 2013, piling pressure on India’s corporate issuers. Equity-linked bankers, however, are not expecting huge defaults, but are instead readying themselves for restructurings, refinancings and even some decently sized primary deals.

Behind that sense of optimism is the enduring appetite investors have shown in Indian structured deals, despite global market volatility. Although some small- and mid-cap companies may struggle to meet redemptions, most of the CBs that large-cap issuers sold are expected to be either refinanced or paid down.

“The Indian growth story is still intact, despite global market turmoil, and there is a perception that, once certain economic indicators like inflation come under control, emerging markets will outperform,” Aloke Gupte, head of equity-linked at JP Morgan.

“Already, there are discussions between banks and corporations about primary deals and even about how best some of them can be restructured,” he added.

Indian CBs have been a rare commodity of late, especially relative to the 2004–07 period when high-premium, zero coupon paper from the country flooded the equity-linked market. Many companies and investors, who had bet that these stocks would rise to stratospheric levels during those years, were, however, proven completely wrong after the market turned in early 2008.

The wave of CBs left many issuers stuck with debt obligations that were, in many cases, double their market caps, and they defaulted on their obligations. The stories of repayment troubles were many in the last couple of years, but the most prominent among them were the woes of pharmaceutical group Wockhardt and new energy manufacturer Suzlon Energy. The two were the prime examples of the challenges of restructuring structured equity debt in the complicated Indian market.

Suzlon, for instance, sold two CBs for a total principal of US$500m in 2007, but ran into trouble meeting covenants on its debt and struggled to refinance bonds that ended well out of the money. Wockhardt is still fighting a long-running battle with holders of US$74m of its US$110m zero coupon CBs after defaulting in 2009.

Markets still open

As a result of troubles at these – and other – companies, foreign investors turned risk averse and showed interest only in low premium, high-yield structures, ensuring that India’s CB market had been all but non-existent in the last year or so.

However, times are changing and bankers are expecting more equity-linked business from India in the form of primary deals or refinancings that are coming up for redemption.

“Companies that have held back until the last minute really don’t have much of a choice but to accede to investors’ demands. So, there could be some deals that are basically low-premium, high-coupon structures. Also, there is still an issuance window for high-quality Indian credits – if they lower their pricing expectations,” said one banker.

People apply coloured powder to a woman's face as they celebrate Holi in Ahmedabad.

Source: Reuters/Amit Dave

People apply coloured powder to a woman’s face as they celebrate Holi in Ahmedabad.

Suzlon proved that point in April this year, when it raised US$175m through a five-year CB that showed investors still had confidence in the company, despite its struggles with debt management. The Suzlon deal, the first CB from India in 2011, funded the company’s purchase of the remaining 4.84% stake in REpower Systems and came less than a year after the former completed the drawn-out restructuring of CBs issued in 2007.

Suzlon’s success suggested investors remained interested in Indian CBs – at the right price.

Suzlon’s CB was structured in a way that left it looking very likely to be converted into equity. It paid a 5% coupon and a 6.5% yield, with the conversion premium fixed at just 10% over a reference price of Rs49.10 – the average of the stock price on April 4 and April 1. The equity-like, low-premium, high-coupon structure was enough to draw investors into the deal.

No need for panic

Bankers pointed to small or mid-tier companies as the real worry, with many big entities still expected to meet their CB obligations or restructure their debts with relative ease.

The secondary prices of bonds coming up for redemption show investors are not panicking about some Indian CBs. The list of the top three redemptions includes Reliance Communications’ March 2012 CBs, trading at 117 – versus an accreted value of 125 – while Tata Motors July 2012’s are at 125 versus a 126 accreted value.

Bankers are also expecting a number of the upcoming redemptions to be restructured because issuers either extend maturities or agree to more equity-like terms. A recent Crisil report suggested that just 25%–30% of outstanding Indian FCCBs were likely to get converted into equity shares, while about 70%–75% of outstanding deals were likely to be redeemed or restructured as their shares were trading below their conversion prices. Crisis noted that companies might look to revise the conversion prices downwards to make conversions more attractive for bondholders.

There is, of course, a worry that some of these companies may not be able to meet redemptions – if they are unable to access alternative funding. However, they may find restructuring solutions provided they agree to dilute their shareholders.

By Shankar Ramakrishnan, IFR Asia Deputy Editor