Rupee slump costly for $5.5bn in convertible bonds

The economy was growing at more than 9% a year, the rupee was rallying towards a record high against the dollar and the BSE Sensex had surged six-fold in the previous five years, even trumping the performance of China's much vaunted Shanghai stocks.

Today, India and Subex face a different reality altogether. The stock market has dropped by a fifth from the end of 2007 and the rupee in recent weeks has hit successive record lows - a costly combination for Indian companies which together face foreign currency convertible bond redemptions this year of nearly USD 5.5 billion.

"There will be some casualties," said Jacques Berghmans, a Brussels-based India convertibles manager with TreeTop Asset Management, which looks after about 1 billion euros in assets. "Some of the companies are already over-leveraged and they will find it tough raising fresh funding in this market," he said.

Investor fear about the fate of the euro zone is the latest factor to have hit confidence in India, undermining the currency.

But investors have raised a number of India-specific red flags to explain why the rupee is the biggest losing currency this year in Asia among those monitored daily by Reuters, including a swelling current account, heavy government spending particularly on subsidies such as oil, a rash of unpredictable regulations and tax and a coalition that is struggling to push through any reforms to bolster an economy now growing at just above 6 percent.

The slide in the stock market meant the conversion prices for many of the convertible bonds was much higher than the market price of the issuer.

The dollars to pay off investors are also much more expensive. The rupee has dropped some 30% from its record high to its record low.

Fitch Ratings predicted in a report in February that about half of the 55 companies with maturing foreign currency convertible bonds (FCCBs) in 2012 were at risk of some type of restructuring or default.

In addition, with the government stuck in policy paralysis ahead of national general elections that must be held by 2014, overseas lenders could become more wary in general of Indian companies, which raised USD 30 billion in external commercial borrowings in 2011.

THE SUBEX EXPERIENCE

The combination of economic factors dragging on India, in particular a fiscal deficit estimated at almost 6 percent of GDP for the year to March 2012, has already prompted Standard & Poor's ratings agency to downgrade the outlook for India's credit rating, which stands just one notch above junk status.

A cut in the rating would raise borrowing costs across the board, adding to the premium lenders would demand from companies such as Subex in return for their capital.

It would also raise further doubts about India's position in the so-called BRICS of Brazil, Russia, India, China and South Africa, a grouping that represents the emerging markets challenging the world order so long dominated by North America and Europe. As India's credit rating is under pressure for a downgrade, rival Indonesia is on the up. Many see it as the new 'I' in BRICS.

Subex is a typical example of the problems many Indian companies face, said analysts, bondholders and executives of companies with overseas holdings.

Started as a provider of software products and services to global telecom companies, it faced a promising future in 2007. More recently, it has suffered from cutthroat competition and sluggish spending on technology in the wake of the global financial crisis.

After selling USD 180 million in five-year convertible bonds in 2007 it sold close to USD 100 million in three-year convertible notes in 2009, a year when the stock market rose a stunning 81%. Conversion, which seemed a reasonable prospect when the bonds were sold, is out of the question.