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Chinese Yuan loans will not be available to the companies who are already defaulting by their previous local borrowing says Deep Mukherjee, Director, Fitch Ratings.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: Liquidity is flush right now and we have the Chinese players open up for ADAG quite significantly. They have refinanced billions of dollars for them. Do you still feel that with all this liquidity sloshing around you could have defaults from companies?
A: The analysis was specifically on FCCBs and Yuan loans were available for Reliance Communications as we mentioned. Given the profile of the companies – the 59 companies whose FCCBs are due in 2012, availability of loan may be subject to the broad credit profile.
It cannot be said that all of them would have similar credit profile and besides the typical trend that has usually been observed as such Chinese Yuan denominated loan denotes that these companies usually have a commercial relationship with Chinese vendors.
To that extent may be some companies are able to access the Chinese loan given the availability. It is unlikely that all of them would be able to access especially the companies, which have high likelihood of default. In fact, a lot of them are already tagged default by their previous local currency borrowings.
Q: Can you tell us some of the companies, which you think are going to be in trouble, the 20 companies where you expect there could be chances of default?
A: The 19 companies where there is a high likelihood of default are the names like Ankur Drugs, Wanbury, GTL Infrastructure. These are all known names and then there are a host of other companies in the report having weak finances, are weak and significantly related to the time of FCCB issuances. Some of them are already having some form of payment problem with the existing local currency data. They will face very significant challenges in redeeming the FCCBs outstanding this year.
Q: How dangerous or serious can this situation be? In the last case we had of an FCCB near default or default – that was Wockhardt. There the creditors went to the extent of asking for liquidation of the company. Do things get that bad for any of these companies?
A: It is also the prerogative of the investors, the FCCB investors of how they want to resolve the issues in the event that there is a non-redemption or timely payment. Given the case history of Indian bankruptcy laws, the legal route recovery may be somewhat protracted. Again, it is difficult to say how many of them would take a legal action in the event that there is non-payment.
Q: How much is already factored in, in their bonds or their equity price at this point? Do you think the market is working with a scenario that the liquidity for these companies is going to be very tight and hence a default is priced in or do you think the event risk is still here?
A: There are two concepts; one is what one typically sees in other jurisdictions. If there is a default / bankruptcy, the equity prices get immediately affected. However, in India the case history is mixed as to what extent the equity price gets affected in the event of a default. Obviously one can argue there is some overhang, but it is difficult to make a sweeping comment on all 59 companies.
Again as far as YTMs of the traded FCCBs are concerned it tends to show a very high default risk, but again the problem with YTM is that a significant portion of the YTM also takes in factors like liquidity premium or interest rates risk which is not a pure default risk measure. To that extent, some of the YTM suggested default risks might be higher than what may be expected in current report.
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