NEW DELHI: After cheap toys, consumer goods and other manufactured products, cheaper loans could be the next major Chinese import into India, and the credit may go to a potential FCCB crisis looming large over Indian corporates.
In the next one and half years, close to 100 Indian companies need to repay an estimated Rs 33,000 crore (over USD 7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) and they are scurrying around for cheaper resources to meet these repayment obligations.
The Chinese banks may emerge as the big winners as a host of Indian companies have begun exploring possibility of getting cheaper loans from China to meet their other costlier foreign borrowing obligations and ward off a red mark on their creditworthiness, a senior banker said.
The FCCBs have been a widely preferred loan instrument for Indian companies borrowing money from overseas markets, especially during 2006 and 2008 when the stock markets were on a high and allowed the companies to easily tie-up loans which were low-cost, but had equity as a convertible.
As the name suggests, the lenders can convert these bonds into equity if the debt is not repaid upon maturity, which is generally five years or more.
NEW DELHI: The falling value of rupee may make theforeign loans availed by the Indian companies this year costlier by an estimated over Rs 25,000 crore (about USD five billion), if the current currency valuations persist, experts have warned.
The corporates had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to save costs arising out of higher interest rates and liquidity constraints within the country, but the subsequent fall in the rupee value has negated the benefits, experts believe.
Indian companies have borrowed close to USD 29 billion in foreign currencies, through ECBs ( External Commercial Borrowing) and FCCBs (Foreign Currency Convertible Bonds), since the beginning of this year, as against such loans worth USD 18 billion during the entire 2010.
A sharp fall of about 17 per cent in the value of rupee -- from near Rs 44-level against the US dollar at the start of 2011 to below Rs 51-level currently -- has made the cost of repaying these foreign loans costlier by a similar margin.
For example, an Indian company would now need to pay an amount of about Rs 5,134 crore (based on current rupee value of Rs 51.34 per US dollar) towards the principal amount to a bondholder of USD one billion, while a similar loan amount would have been worth about Rs 4,400 crore at the beginning of 2010, a banker said.
Adding to the woes of the companies, the shares of the companies having issued FCCBs have fallen sharply since the time of their issuance, thus making it unattractive for the bondholders to convert their loans into equity.
As per the estimates, FCCBs worth about USD 10 billion are due for redemption in the next 12-18 months and over 80 per cent of these bonds might not be converted into shares, said an official with a private sector bank advising some companies on restructuring on their foreign loans.
The possibility of such a scenario increases the risk of loan default by their issuer companies, he added.
SMC Global Securities' Strategist and Head of Research, Jagannadham Thunuguntla, said that the additional burden due to the rupee depreciation so far this year could be of Rs 25,200 crore for the Indian companies on their ECBs worth about USD 30 billion raised this year.
Ashika Stock Broking's Research Head (Equities) Paras Bothra said that the liabilities for the companies having raised these loans a year ago could be about 10 per cent and above on the principal amount, if the their loans mature in the current situation
The companies which issued FCCBs in 2007-2008 include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp,Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.
However, share prices have fallen sharply since 2008 for many of the companies that had issued FCCBs to raise loans and their stocks are currently trading way below the conversion price fixed at that time.
This has put the borrowers and also the lenders in a spot, as the companies cannot risk defaulting on the FCCB redemption payment and the bondholders would not convert the bonds into shares at a price way above the current levels.
There is another option that allows the companies to reset the conversion price, but this generally leads to a decline in the company's share price as it is seen as an inability on the part of the borrower to meet its payment obligations.
Still, a lot of companies have recently reset their FCCB conversion prices at the cost of their share prices and these include Suzlon, Spicejet and Gitanjali Gems. A vast majority of the companies are, however, looking for other resources to redeem their FCCBs.
With loans having become expensive in India and most of the Western markets already having been tapped, the companies are approaching investment banks to explore the possibility of tying up funds from Chinese banks, another banker said.
In the next one and half years, close to 100 Indian companies need to repay an estimated Rs 33,000 crore (over USD 7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) and they are scurrying around for cheaper resources to meet these repayment obligations.
The Chinese banks may emerge as the big winners as a host of Indian companies have begun exploring possibility of getting cheaper loans from China to meet their other costlier foreign borrowing obligations and ward off a red mark on their creditworthiness, a senior banker said.
The FCCBs have been a widely preferred loan instrument for Indian companies borrowing money from overseas markets, especially during 2006 and 2008 when the stock markets were on a high and allowed the companies to easily tie-up loans which were low-cost, but had equity as a convertible.
As the name suggests, the lenders can convert these bonds into equity if the debt is not repaid upon maturity, which is generally five years or more.
NEW DELHI: The falling value of rupee may make theforeign loans availed by the Indian companies this year costlier by an estimated over Rs 25,000 crore (about USD five billion), if the current currency valuations persist, experts have warned.
The corporates had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to save costs arising out of higher interest rates and liquidity constraints within the country, but the subsequent fall in the rupee value has negated the benefits, experts believe.
Indian companies have borrowed close to USD 29 billion in foreign currencies, through ECBs ( External Commercial Borrowing) and FCCBs (Foreign Currency Convertible Bonds), since the beginning of this year, as against such loans worth USD 18 billion during the entire 2010.
A sharp fall of about 17 per cent in the value of rupee -- from near Rs 44-level against the US dollar at the start of 2011 to below Rs 51-level currently -- has made the cost of repaying these foreign loans costlier by a similar margin.
For example, an Indian company would now need to pay an amount of about Rs 5,134 crore (based on current rupee value of Rs 51.34 per US dollar) towards the principal amount to a bondholder of USD one billion, while a similar loan amount would have been worth about Rs 4,400 crore at the beginning of 2010, a banker said.
Adding to the woes of the companies, the shares of the companies having issued FCCBs have fallen sharply since the time of their issuance, thus making it unattractive for the bondholders to convert their loans into equity.
As per the estimates, FCCBs worth about USD 10 billion are due for redemption in the next 12-18 months and over 80 per cent of these bonds might not be converted into shares, said an official with a private sector bank advising some companies on restructuring on their foreign loans.
The possibility of such a scenario increases the risk of loan default by their issuer companies, he added.
SMC Global Securities' Strategist and Head of Research, Jagannadham Thunuguntla, said that the additional burden due to the rupee depreciation so far this year could be of Rs 25,200 crore for the Indian companies on their ECBs worth about USD 30 billion raised this year.
Ashika Stock Broking's Research Head (Equities) Paras Bothra said that the liabilities for the companies having raised these loans a year ago could be about 10 per cent and above on the principal amount, if the their loans mature in the current situation
The companies which issued FCCBs in 2007-2008 include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp,Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.
However, share prices have fallen sharply since 2008 for many of the companies that had issued FCCBs to raise loans and their stocks are currently trading way below the conversion price fixed at that time.
This has put the borrowers and also the lenders in a spot, as the companies cannot risk defaulting on the FCCB redemption payment and the bondholders would not convert the bonds into shares at a price way above the current levels.
There is another option that allows the companies to reset the conversion price, but this generally leads to a decline in the company's share price as it is seen as an inability on the part of the borrower to meet its payment obligations.
Still, a lot of companies have recently reset their FCCB conversion prices at the cost of their share prices and these include Suzlon, Spicejet and Gitanjali Gems. A vast majority of the companies are, however, looking for other resources to redeem their FCCBs.
With loans having become expensive in India and most of the Western markets already having been tapped, the companies are approaching investment banks to explore the possibility of tying up funds from Chinese banks, another banker said.
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