With USD 5 billion worth foreign currency convertible bonds (FCCB) issued by 48 companies set to mature in 2012, rating agency Standard and Poor's (S&P) said that almost half of them would default on grounds of inability to raise funds for refinancing the instruments. At the time of issue, the companies had assumed that investors would choose to convert them into equity. And the companies had made no provisions for their redemption. However, investors don't want to convert the entire amount now and this is going to cause trouble for the companies, according to S&P.
In an interview with CNBC-TV18, Suzanne Smith, Managing Director, Asia-Pacific Head and Analytical Manager for Commodities Ratings at S&P said the global economy and equity markets are soft at present, making it even more difficult for the companies to redeem these bonds.
Smith clarified that the interest rates for the entire group of companies could be as high as USD 700 million. "The range would be at least 25% higher interest costs because the interest has gone up in general and these were very low coupon bonds," she explained. The depreciating rupee will also add to the interest cost, if companies go for restructuring or refinancing. Hence, there is a higher chance of defaults, said Smith.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: Which companies in specific do you think are going to get into trouble because of the kind of rise in cost we have seen and will they be able to refinance it given the volatility and risk off we are seeing in the global markets right now?
A: Yesterday we talked about the roughly USD 5 billion of foreign currency convertible bonds that were issued about 5 years ago and all that is due to mature in 2012. At the time of their issue, they were issued with fairly large conversion premiums and as mentioned, at very low interest rates.
The environment right now has changed quite a bit with the global economy being soft and the equity markets being soft. Most of these bonds are now out of the money and in order to restructure or to redeem them, companies will have a number of options. The depreciating rupee is also making it more difficult. We looked at about 48 different companies and we estimated that about half of them would run into difficulties with redeeming or restructuring.
Q: Any specific countries that you can name that you expect will have a problem and more importantly how much expensive will it be for them to get fresh loans, how much may the interest cost on the same loan go up by if you include rupee depreciation as well?
A: We estimate the interest rates for the group as a whole, could go up by about USD 700 million but for individual companies it would differ. The range would be at least 25% higher interest costs because the interest has gone up in general and these were very low coupon bonds to begin with.
It depends on whether they are looking at new external commercial borrowings or new funding from domestic market. The domestic market would be more expensive and the extra commercial borrowings may be a bit cheaper. But, it will still significantly be more than what they were issued at initially. We did publish a list of companies but I am not going to name any particular companies that we think are likely to default.
Q: How much more in terms of basis points will the cost of money go up for them? Does it go up by 5-6% points when they go for fresh borrowing and what will be the cost of repayment in terms of rupees, considering that the rupee has depreciated by 30% in year on year terms?
A: Just regarding interest rates if you figure that some of them were issued at zero coupon bonds or at 1-2% interest rates. If they were to go into the external commercial borrowing market now, they will probably borrow at about 6%. In the domestic market we estimate the borrowings might be about 10-12%. That’s a significant rise in the interest cost.
As far as the rupee cost, it would be the amount of the rupee depreciation plus many of these have redemption premiums. So the increased costs could be considerable for the companies. If they are able to even obtain the money. One of the points that we made was that many of the companies may have difficulty accessing new capital and that their options are limited as a result of that and they would seek to either restructure or default on payment.