Fitch sees 20% of $7-bn FCCB redemptions failing this year
The report says of the 31 corporates in the 'likely to redeem' category, five are better-placed to redeem their FCCBs using a financing option of their choice.
By PTI | Updated:
MUMBAI: Nearly 20 per cent of the country's estimated USD 7 billion foreign currency convertible bonds (FCCBs), due for redemption this year, have an extremely high likelihood of default, Fitch Ratings said in a report.
Another 17 per cent of the FCCBs, due this year, are likely to undergo restructuring (mostly maturity extensions), says the report, adding that the rest 63 per cent have a high likelihood of redemption.
Fitch studied 59 companies whose FCCBs are due in 2012. The companies were divided into four broad groups with respect to FCCB redemption possibilities, namely, likely to redeem, likely to restructure, likely to restructure with significant distressed debt exchange features, and default/imminent default with low recovery.
The report says of the 31 corporates in the `likely to redeem' category, five are better-placed to redeem their FCCBs using a financing option of their choice, while the remaining 26 companies have a relatively weaker financial profile, but would still be able to access low-cost ECB funding or even high-cost domestic debt.
"At least some of the 26 companies would exhibit deterioration in interest coverage due to their somewhat limited access to funding options," it said
Nine companies in the `likely to restructure' group, despite having a reasonable business model, are currently experiencing stretched liquidity and stressed cash flows. The ultimate FCCB payment is likely to be driven by the sale of identifiable, non-encumbered assets. Such FCCBs have a high likelihood of undergoing restructuring involving a maturity extension but are unlikely to have significant distressed debt exchange features, it said.
The remaining 19 companies have a high likelihood of default on FCCB payments or restructuring the FCCBs with significant distressed debt features. In this group, at least eight have already defaulted on their other debt obligations.
Given their significantly weakened cash flow, unsustainable debt levels and existing default status, the prospect of recovery actions by domestic lenders against a number of these companies is high, says the report. In the event of default on FCCB payment, the recovery may be low given their unsecured nature.
Some of the FCCB investors have purchased credit protection measures, such as credit-linked notes and credit default swaps, from various institutions, including the overseas branches of domestic banks. This may provide a motivation to some banks to provide ECB loans to some companies to refinance the FCCBs.
In such an event, the redemption rate is likely to improve from the current estimated level of 63 per cent, the report said.
Another 17 per cent of the FCCBs, due this year, are likely to undergo restructuring (mostly maturity extensions), says the report, adding that the rest 63 per cent have a high likelihood of redemption.
Fitch studied 59 companies whose FCCBs are due in 2012. The companies were divided into four broad groups with respect to FCCB redemption possibilities, namely, likely to redeem, likely to restructure, likely to restructure with significant distressed debt exchange features, and default/imminent default with low recovery.
The report says of the 31 corporates in the `likely to redeem' category, five are better-placed to redeem their FCCBs using a financing option of their choice, while the remaining 26 companies have a relatively weaker financial profile, but would still be able to access low-cost ECB funding or even high-cost domestic debt.
"At least some of the 26 companies would exhibit deterioration in interest coverage due to their somewhat limited access to funding options," it said
Nine companies in the `likely to restructure' group, despite having a reasonable business model, are currently experiencing stretched liquidity and stressed cash flows. The ultimate FCCB payment is likely to be driven by the sale of identifiable, non-encumbered assets. Such FCCBs have a high likelihood of undergoing restructuring involving a maturity extension but are unlikely to have significant distressed debt exchange features, it said.
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The remaining 19 companies have a high likelihood of default on FCCB payments or restructuring the FCCBs with significant distressed debt features. In this group, at least eight have already defaulted on their other debt obligations.
Given their significantly weakened cash flow, unsustainable debt levels and existing default status, the prospect of recovery actions by domestic lenders against a number of these companies is high, says the report. In the event of default on FCCB payment, the recovery may be low given their unsecured nature.
Some of the FCCB investors have purchased credit protection measures, such as credit-linked notes and credit default swaps, from various institutions, including the overseas branches of domestic banks. This may provide a motivation to some banks to provide ECB loans to some companies to refinance the FCCBs.
In such an event, the redemption rate is likely to improve from the current estimated level of 63 per cent, the report said.
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