Debt knocks on corporate doors

Suzlon Energy's default on the repayment of $220 million of foreign currency convertible bonds (FCCBs) due earlier this month may just be a wake-up call on a looming debt default crisis for Indian corporates.

Going by estimates firmed up by Fitch, a total of 59 Indian companies are facing redemption of up to $7 billion in FCCBs this year, of which, the ratings company expects a third to either default or go in for restructuring. Prior to Suzlon's debt default crisis, Sterling Biotech's $184-million delinquency in May had shaken things up.

Foreign debt that looked cheap just a few years ago is now beginning to pinch Indian companies as the payback approaches. In the three years to 2010, Indian companies are estimated to have sold nearly $13 billion of FCCBs, according to data from Dealogic. While there were clear advantages of borrowing abroad in the boom period just prior to the global financial meltdown, the companies that sold these convertible debt instruments find themselves in a bit of a spot with most of those bonds maturing this year. Especially as the global financial crisis and consequent decline in equity prices led to FCCBs not getting converted into equity and a resultant redemption pressure on Indian companies. The immediate challenge for Indian corporates is to meet the redemption obligations of FCCBs that fall due in the next couple of years.

The other challenge is to rekindle the appetite for FCCBs which has been receiving lukewarm response from investors. To mitigate the hardship faced by issuers in redeeming their FCCBs, the RBI has allowed Indian companies to raise fresh ECB/FCCB to refinance their outstanding FCCBs under the automatic route. Proposals for restructuring FCCBs that do not involve a change in conversion price are considered under the approval route. This offers some respite for firms facing redemption pressure. The rush for foreign debt continues unabated, with RBI data issued earlier this month showing that Indian companies raised $2.36 billion through External Commercial Borrowings and FCCBs. 

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