A fifth of FCCBs may see redemption defaults: Fifth

A fifth of India's estimated $7 billion foreign currency convertible bonds (FCCBs) due for redemption in 2012 have an extremely high likelihood of default. Another 17 per cent of the FCCBs due this year are likely to undergo restructuring, mostly maturity extensions.

The remaining 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 based on the likely redemption possibilities - (a) likely to redeem (b) likely to restructure (c) likely to restructure with significant distressed debt exchange features and (d) default / imminent or default with low recovery.

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 had a relatively weaker financial profile, they would still be able to access low-cost ECB funding or even high-cost domestic debt.

On the other hand, Fitch says at least some of the 26 companies would exhibit deterioration in their interest coverage due to their somewhat limited access to funding options compared with the other five companies.

The nine companies in the "likely to restructure" group which, 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.