Clean slate

IFR Asia India Report 2012
5 min read
Daniel Stanton

Indian issuers have largely addressed this year’s mountain of redemptions and the convertible bond market is open again.

A man sweeps the floor at a Buddhist temple in Dharamsala

Source: Reuters/Arko Datta

A man sweeps the floor at a Buddhist temple in Dharamsala

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For much of this year, it was hard to see why anyone would consider investing in Indian convertible bonds again. A wave of over-exuberant issuance in 2007, before the equity market turned sour, had left around US$6bn of foreign currency CB redemptions for this year, and market watchers were predicting disaster as issuers scrambled for cash to meet obligations.

“The year 2007 was characterised by Indian issuers across the size and quality spectrum tapping hunger for Indian equity growth and raising convertibles at aggressive structures, with most CBs having no coupon, 7%–8% back-ended yield and high conversion premiums,” said Mrinal Parekh from Deutsche Bank’s Asia equity-linked origination team.

“The subsequent weaker equity markets and the significant depreciation in the Indian rupee versus the US dollar compounded the redemption woes for issuers,” Parekh added.

Somehow, though, catastrophe was, for the most part, avoided. Now, not including deals already in the restructuring process, there are few redemptions remaining this year.

CBs from Suzlon Energy with a total redemption value of US$209m are due in October, but the company has already shown its willingness to conduct asset sales and ability to secure new credit lines to meet a redemption earlier this year, and analysts are confident it will find the funds.

Notably, issuers have come up with varied solutions. Software firm 3i Infotech completed an exchange offer for its zero coupon euro- and US dollar-denominated CBs due April and July, respectively, giving investors new coupon-paying convertibles. Subex also completed a cashless exchange offer in July, while Reliance Communications and JSW Steel took new loans to meet redemption obligations.

“The overhang has pretty much gone. Whatever was going to be a problem has more or less played out,” said Nick Smith, head of Asia Pacific convertible bond origination at Barclays. There are just two benchmark-sized redemptions scheduled for 2013 and six for 2014.

Investors in Indian CBs have not suffered the big losses they might have expected, although some have been forced to accept extensions of maturity.

A dearth of new Asian CB issuance, far below the amount redeemed during the same period, coupled with a sense that the rupee and the Indian equity market have more potential for upside than downside, is convincing investors to put their money to work.

“We’re seeing some of the larger Indian corporates start to show some interest in FCCBs again,” Smith added.

One of the last potential problems was addressed when a US$150m issue from Jaiprakash Associates last month enabled it to take care of its September 12 redemption of US$523.56m.

While the bond slipped to 98.5 in the aftermarket as its share price fell, it was an encouraging sign that investors were keen to buy into a new Indian issue with no asset swap available and a bond floor of just 85. It was the first Indian primary CB deal without credit hedging for around 18 months.

Still, some believe that, even with the overhang lifted, the primary issuance market is open only to a select few Indian names.

“Sentiment is still pretty dampened for Indian CBs,” said one equity-linked banker. “The ones that have been done so far have had some hedging ability or credit protection. It’s not just any Indian deal that can get done.”

Issuers are also hampered by rules of the Reserve Bank of India, which limit new CBs to a minimum maturity of five years and cap the all-in cost of issuance at 500bp over Libor.

“Now, investor preference for quality, liquid issuers with moderate valuations, coupled with the RBI minimum tenor and pricing guidelines, reduce the universe of potential FCCB issuers to high-credit-quality names, which also have access to cheap loans and local bonds without the forex volatility,” said Deutsche’s Parekh.

“However, blue-chip issuers will continue to tap the FCCB market, taking advantage of the premium pricing, the lower debt costs, as well as ensuring funding from a diversified source,” Parekh added.

Most of this year’s redemptions have been addressed, but there are still several CB restructurings that have yet to be completed, most of them at the smaller end of the scale.

GTL Infrastructure is one of the larger ones, and plans to issue new CBs, up to a principal amount of US$320.5m, in exchange for its outstanding notes due November 29 through a cashless exchange offer.

Optical storage media company Moser Baer delayed a bondholders’ meeting scheduled for August 31 and, at time of writing, had yet to set a new date. It has proposed to pay bondholders a cash amount equal to 5% of face value and give them a new CB representing the remaining 95% of principal. It has zero-coupon bonds with a face value of US$88.5m outstanding, and had been due to repay them on June 21.