June 21, 2012

Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
Primary Credit Analyst: Vishal Kulkarni, CFA, Mumbai (91) 22-3342-4021; vishal_kulkarni@standardandpoors.com Secondary Contacts: Abhishek Dangra, Mumbai (91) 22-3342-3815; Abhishek_Dangra@standardandpoors.com Suzanne G Smith, Singapore (65) 6239-6380; suzanne_smith@standardandpoors.com Research Contributor: Srinath VL, Mumbai; srinath_vl@standardandpoors.com

Table Of Contents
Only A Few FCCB Redemptions Are Likely How We Classify FCCB Issuers Key To The Sustainable Growth Of The FCCB Market Related Criteria And Research

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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors
For some Indian companies, issuing foreign currency convertible bonds (FCCBs) during the stock market boom of 2006-2008 seemed like a bright idea. But it's now turning into a nightmare. The bonds are usually U.S. dollar-denominated, and have a fixed maturity date and low interest rate (0% in many cases). Investors have an option to convert the bonds on maturity into equity shares at a predetermined price. This strategy helped the companies get low-cost foreign currency loans for overseas acquisitions or expansion. Issuers and investors expected India's stock market to continue to rise and the price of the companies' stock to exceed the conversion price when the bonds matured. At that point, bondholders could have converted their holdings to equity and the issuers wouldn't have had to repay them in cash. This all seemed to make sense until the 2008 financial crisis led to a recession and pummeled world stock markets, which are yet to fully recover. But now, with India's stock market still in a slump, investors don't want to convert the US$5 billion in FCCBs that will mature in the rest of 2012 into stock that's worth 20%-90% less than the conversion price. Instead, they want their money. The steep 30% drop in the value of the Indian rupee (INR) against the U.S. dollar over past two years is exacerbating the problem. The result is that many FCCB issuers may have trouble finding funds to repay bondholders-and that those that can't will face payment default. Overview The slump in India's stock market in recent years means that holders of the US$5 billion in foreign currency convertible bonds maturing in the rest of 2012 aren't likely to convert the bonds into equity in the Indian companies that have issued them. Redeeming the bonds will be hard for most FCCB issuers because they have limited access to funds and borrowing rates are high. About half of the 48 companies with FCCBs maturing in the rest of 2012 will have to somehow restructure their bonds to avoid default on payment.

Standard & Poor's Ratings Services believes that as many as half of the 48 companies with FCCBs maturing in the rest of 2012 may default. To avoid that fate, they would have to restructure the bonds. Their options include: (1) roll over the bonds with later maturity dates and higher coupons; (2) lower the conversion-to-equity price; or (3) get bondholders to accept only a partial repayment of their principal. Perhaps only five of these companies are placed well enough to pay off their FCCB debt, in our opinion. About 28 companies are likely to have to choose one of the other possible restructuring options. Of our rated entities, Tata Motors Ltd. (BB-/Stable/--) is likely to redeem its FCCBs at manageable costs this year and Tata Steel Ltd. (BB/Stable/--) has already rolled over the maturity of its bonds.

Only A Few FCCB Redemptions Are Likely

The FCCB issuers find themselves in a fix because of a tepid global economy. This has slowed the issuers' revenue and profit growth, dragged down their stock prices, and left them less able to service debt. Were they to pay off their FCCBs, about one-third of the issuers would be left with EBITDA-to-interest coverage of less than 1.5x (meaning

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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors

operating cash flows will barely be able to meet interest liabilities).

Access to loans is limited and borrowing costs are high

We expect most of the 48 companies to try to borrow via external commercial borrowings or through qualified institutional placements (i.e., seeking funds from institutional investors) to pay off their FCCB debt. The Reserve Bank of India, the country's central bank, allows companies to take the external commercial borrowing route to redeem FCCB bonds. The maximum interest rate allowed on such borrowings is LIBOR plus five percentage points. Orchid Chemicals & Pharmaceuticals Ltd., Hotel Leela Venture Ltd., and The India Cements Ltd. have in the past redeemed FCCBs in this manner. We believe JSW Steel Ltd. will do the same, probably in June 2012. However, this option is available only to companies with strong credit profiles. Moreover, overseas branches of Indian banks provide most of such loans and could be constrained by their sometimes limited access to U.S dollars. We estimate that interest expenses will rise by 25%, on average, for companies that can find funding to pay off FCCBs. That's because about 80% of companies with FCCBs maturing in the rest of 2012 pay less than 2% interest on the bonds, and about 60% have a zero coupon. However, the cost of borrowing to pay off the FCCBs would be much higher--about 6% for external commercial borrowings and 10%-12% for loans from domestic commercial banks. On an aggregate basis, we estimate that FCCB issuers will have to pay US$700 million a year in additional interest--if they can refinance their FCCBs maturing in 2012. Loans from Chinese banks could become an attractive funding source for some FCCB issuers. Already, Reliance Communications Ltd. (RCom) has borrowed US$1.18 billion from Chinese banks at an interest rate of about 5%. However, such loans are likely to be available to companies in the power and other infrastructure-related sectors that have import-related relationships with China's manufacturing companies.

Asset sales and equity issuances offer little hope

Fresh equity issuance and asset sales are unlikely funding sources for FCCB issuers, in our view. The depressed share prices and the low shareholding of promoters (those who help to form, organize, and finance companies) eliminate the fresh equity issuance option. Also, it takes time to sell assets--and secured lenders may not support asset sales for redemption of unsecured FCCBs. RCom has been trying to sell its controlling stake in Reliance Infratel Ltd., its telecom tower unit, for some time. Suzlon Energy Ltd. plans to raise close to US$100 million from asset sales to redeem part of its US$580 million FCCB maturities in 2012. We believe that Suzlon is unlikely to achieve this goal because the first tranche of FCCBs mature in June 2012 and asset sales take time. Strides Arcolab Ltd. and Hotel Leela have recently raised funds from asset sales. However, such examples are few and far between.

Weakening rupee and high redemption premiums add to the woes

The depreciation of the rupee against the U.S dollar over the past year will considerably increase the redemption amount of maturing FCCBs in rupee terms. Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about INR42 to the U.S. dollar. The rupee has now plummeted more than 30% to about INR55 per U.S. dollar. This would add about INR100 billion (about US$2 billion) to the value of FCCB maturities in 2012. Redemption premiums, which are about 40% in most cases, have added to the amount that FCCB issuers will have to pay to bondholders should they go that route.

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How We Classify FCCB Issuers

We believe that close to half of the companies that have FCCBs maturing in the rest of 2012 are likely to restructure the bonds. We have classified the 48 FCCB issuers with bonds maturing in 2012 into four categories depending on their likely strategy (see table 1): Likely to redeem at manageable cost; likely to redeem at high cost; likely to restructure the FCCBs with features of a distressed exchange, as defined in our criteria; and could default on payment. Eight companies have taken care of their FCCB maturities so far in 2012. Standard & Poor's does not rate any of these FCCBs. Standard & Poor's views restructurings where the issuing entity faces distress and offers less than the original promise as defacto defaults. This is even though the investors may accept the offer voluntarily. The alternative for investors is a general payment default, in which they stand to fare even worse. This motivates (at least partially) investors to accept such an offer for restructuring. In case of FCCBs maturing in 2012, many restructurings are likely to be due to issuers' operating and financial difficulties, and could resemble distressed exchanges.
Table 1

Classification Of Companies Based On How They Are Likely To Handle Maturing FCCBs
Category Likely to redeem at manageable cost Key parameters and general characteristics Low ratio of FCCB to total debt; good cash balances and EBITDA interest coverage; comfortable promoter stake; favorable market capitalization in relation to total debt and FCCB maturity amount; ability to raise external commercial borrowings; low leverage. EBITDA interest coverage at 2.0x-2.5x; cash not sufficient to refinance FCCBs; positive operating cash flow and leverage support fresh borrowings; external commercial borrowing not likely source of funds. Examples Tata Motors Ltd., JSW Steel Ltd., Strides Arcolab Ltd., Pidilite Industries Ltd. Jaiprakash Associates Ltd., Tulip Telecom Ltd., Everest Kanto Cylinder Ltd.

Likely to redeem at high cost Likely to restructure the FCCB with features of a distressed exchange Could default on payment

Weak EBITDA interest coverage and leverage constrain fresh borrowing; low Subex Ltd., ICSA India Ltd., Suzlon promoter shareholding disincentivises fresh equity raising; market capitalization Energy Ltd. lower than total debt outstanding; some are already under corporate debt restructuring. Very low market capitalization; negligible liquidity; very high leverage; EBITDA interest coverage is less than 1.0x; operating cash flow negative, low promoter shareholding; accounting issues in some cases. Murli Industries Ltd., Prithvi Information Solutions, KLG Systel Ltd., Pokarna Ltd., Websol Energy System, Wanbury Ltd.

Borrowers and investors seem to regard the rollover of FCCBs with higher coupons and maturity extensions as the most acceptable forms of restructuring. In 2009, Tata Steel rolled over its FCCBs maturing in September 2012 to November 2014 and increased the coupon rate from 1% to 4.5%. We view the company's move as an example of financial prudence, and not a restructuring. It took action well in advance of the debt's due date and not under duress. On Feb. 27, 2012, Subex Ltd. extended its FCCB maturity date from March 9, 2012, to July 9, 2012. However, the company's move was due to its weak performance, depressed share price, and inability to find funding. Subex now expects to roll over some FCCBs. Suzlon has also sought more time to repay its US$360 million FCCBs that are due in June 2012. Lowering the conversion price gives FCCB holders more shares on conversion; but the equity dilution is higher for existing shareholders and the share price could therefore fall. For companies where promoters do not have a sizable equity stake, lowering the conversion price may not be an option as promoters may not be willing to let their holding erode further. Resetting the conversion price needs approval from the Reserve Bank and is subject to the shareholdings of foreign institutional investors staying within the limits that the central bank has stipulated.

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Uncertainty over bankruptcy proceedings mars recovery prospects

Slow and unpredictable legal proceedings in India in cases relating to corporate defaults are likely to deter bondholders from taking the judicial route in Indian courts for recovery of funds. For example, investors in FCCBs that Venus Remedies Ltd. had issued filed for liquidation proceedings after the company defaulted on its payments. However, the investors had to settle for a negotiated maturity extension after a protracted court battle. An unintended effect of a recent spate of legal cases by FCCB bondholders seeking liquidation of bond issuers that default is that it may weaken the credibility of Indian FCCBs. Recovery expectations of FCCB holders may be dashed if secured lenders to the company also consider recovery actions for defaults on secured loans. Most FCCBs are unsecured and rank lower than secured debt in terms of repayment. Defaults on FCCBs seem inevitable when issuers are starved for funds and bondholders insist on repayment of their money at maturity. The defaults hamper the ability of the issuers to access international capital markets. Recent defaulters are Wockhardt Ltd., Cranes Software International Ltd., Aftek Ltd., JCT Ltd., Venus Remedies, Marksans Pharma Ltd., Mascon Global Ltd., Gremach Infrastructure Equipments And Projects Ltd., Pyramid Saimira Theatre Ltd., and Zenith Infotech Ltd. We believe the ongoing court battle between Wockhardt, which defaulted on its US$110 million FCCBs in 2009, and investors in the FCCBs could set the tone for such cases. The court directed the company to repay FCCB holders before paying secured creditors of the company. The matter remains pending, with the secured creditors threatening to appeal the court decision. Another ongoing legal case involves Zenith Computers Ltd., which defaulted on its FCCBs. The trustee for the bonds (on behalf of the lenders) has filed a winding up petition against the company.

Key To The Sustainable Growth Of The FCCB Market

The troubles confronting FCCB issuers in 2012 will cause those that have suffered the most damage to shy away from such bonds in the future, in our opinion. In contrast, companies that are ready to issue bonds with reasonable expectations--with 5%-6% interest rate and a conversion premium of less than 20%--should be able to attract investors. For example, Suzlon recently issued US$150 million of FCCBs with an interest rate of 5%. The bonds are mandatorily convertible into equity at a 10% premium to the stock market price at the time of the issuance. Meanwhile, even the weakest companies that have FCCBs maturing in 2012 (see table 2) are unlikely to consider defaulting on the bonds as their first option, given the messy litigation process. Many companies are in talks with bondholders to roll over maturing FCCBs with revised terms, and with banks to refinance the bonds. Global investors will watch for the outcome. And the future of FCCBs will likely depend on whether the new arrangements work for issuers and investors alike.

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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors

Table 2

The Companies With FCCBs Maturing In 2012

Current share Ratio Amount price of due in 2012 (INR; FCCB (including as of amount Total Expected redemption June to total debt-to-EBITDA EBITDA-to-interest EBITDA-to-interest premium, Coupon Maturity Conversion 20, debt ratio on ratio (x) before ratio on mil. US$) (%) date price (INR) 2012) (%) redemption (x) redemption redemption (x) 5.92 57.03 19.6 167.64 0 0 5.50 0 April 11, 2012 April 28, 2012 March 14, 2012 Feb. 28, 2012 113.9 604 225 348.3 34.6 301.8 126.5 111.2 12 15 16 49 3.2 2.6 17.4 5.3 5 5.5 1 2.1 4.3 4.6 0.8 1.5

Corporate

Redemption complete Aarvee Denims & Exports Ltd. Bharat Forge Ltd. Kamat Hotels India Ltd. Orchid Chemicals & Pharmaceuticals Ltd. Rajesh Exports Ltd. Reliance Communications Ltd. Ruchi Infrastructure Ltd. Tata Steel Ltd. (BB/Stable/--)

25.46 1181.51

0 0

Feb. 21, 2012 March 01, 2012 Feb. 03, 2012 Sep. 05, 2012

67.1 661.2

136.3 64.3

5 15

(6.8) 5

(2.3) 9.3

(2.2) 5.6

18.78

39.2

19

34

4.3

N.A.

N.A.

471.15

1.00

730.5

423.3

4.1

2.9

2.8

Redemption at manageable costs JSW Steel Ltd. 391.84 Pidilite Industries Ltd. Rolta India Ltd. Strides Arcolab Ltd. Tata Motors Ltd. (BB-/Stable/--) 51.84 134.77 116.04 623.5

0 0 0 0 0

June 28, 2012 Dec. 07, 2012 June 29, 2012 June 27, 2012 July. 12, 2012

953.4 204.8 368 462 181.4

638 161.7 73.0 758.4 245.5

14 84 46 23 8

2.5 0.9 2.2 6 2.3

4.3 14.9 12.7 2.6 7.5

3.8 8.2 6 2 6.6

Redemption at a high cost Easun Reyrolle 5.7 Ltd. Educomp Solutions Ltd. Everest Kanto Cylinder Ltd. Jaiprakash Associates Ltd. Karuturi Global Ltd. Man Industries India Ltd. 110.75 49.98 523.56 55.07 64.63

0 0 0 0 0 0

Dec. 5, 2012 July 26, 2012 Oct. 10, 2012 Sep. 12, 2012 Oct. 19, 2012 May 23, 2012

315 590 271.3 111.8 19 115

61.8 149 28.7 70.4 4.5 104

16 37 67 6 49 78

11.4 3.1 3.4 9.2 4.1 5.1

209.2 6 17.1 2.6 13.3 13.1

5.7 3.7 4.2 2.3 4.1 2.6

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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors

Table 2

The Companies With FCCBs Maturing In 2012 (cont.)

Micro Technologies India Ltd. Plethico Pharmaceuticals Ltd. Prime Focus Ltd. Sharon Bio-Medicine Ltd. Surana Industries Ltd. Shri Lakshmi Cotsyn Ltd. Tantia Constructions Ltd. Tulip Telecom Ltd. Uflex Ltd. 18.63 0.50 July 23, 2012 Oct. 23, 2012 Dec. 13, 2012 Dec. 04, 2012 June 20, 2012 Sep. 27, 2012 July 18, 2012 Aug. 26, 2012 March 09, 2012 250 141.1 34 1.5 11.3 7.4

109.44

483.8

369.1

94

2.7

3.5

2.1

78.99 23.3

0 0

111 252

50.6 446.3

86 N.A.

3.7 N.A.

6.7 2.7

2.6 1.9

18.12 14.46 3.44

2.00 0 1.00

137 108 140

151.7 104.8 51.7

6 7 4

8 3.9 5.3

1.9 2.8 2.1

1.7 2.6 2

140.17 11.45

0 4.00

227.4 145

100.0 103.5

39 4

2.7 2.3

4.6 3.4

3.2 3.3

Likely to restructure the FCCBs with features of a distressed exchange Firstsource 240.13 0 Dec. 04, 92.3 8.3 Solutions Ltd. 2012 Gayatri Projects Ltd. Gemini Communications Ltd. ICSA India Ltd. Tranche I ICSA India Ltd. Tranche II Subex Ltd. Tranche I Subex Ltd. Tranche II Grabal Alok Impex Ltd. Suzlon Energy Ltd. - Tranche I Suzlon Energy Ltd. - Tranche II Suzlon Energy Ltd. - Tranche III Suzlon Energy Ltd. - Tranche IV 42.34 20.5 0 6.00 Aug. 03, 2012 July 18, 2012 April 28, 2012 March 10, 2012 March 09, 2012 March 09, 2012 April 05, 2012 June 12, 2012 Oct. 11, 2012 June 12, 2012 Oct. 11, 2012 51 97.3 N.A. 17.5 656 22.7 288 41.7 100.5 17.9

125 7 26

7.8 16.1 3.2

3.2 1.8 2.7

1 1.5 2.3

32.74 30.01 85.16 53.05 28.43 306.87 175.84 53.44 32.8

2.50 2.50 5.00 2.00 1.00 0 0 7.50 7.50

189.7

14.7

18

3.1

3.2

2.1

78

5.4

3.1

1.6

28 13

11.3 12.7

1.7 0.9

1.1 0.8

Could default on payment 3i Infotech Ltd. 93.86 Tranche I

July 27, 2012

154.3

8.8

9.4

0.9

0.9

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Pileup Of Indian Foreign Currency Convertible Bond Maturities Will Test Issuers And Investors

Table 2

The Companies With FCCBs Maturing In 2012 (cont.)

3i Infotech Ltd. Tranche II Ankur Drugs & Pharma Ltd. Great Offshore Ltd. GTL Infrastructure Ltd. GV Films Ltd. Hotel Leela Ventures Ltd. Indowind Energy Ltd. KLG Systel Ltd. KSL and Industries Ltd. Moser Baer India Ltd. Tranche I Moser Baer India Ltd. Tranche II Murli Industries Ltd. Pioneer Embroideries Ltd. Pokarna Ltd. Prithvi Information Solutions Pyramid Saimira Theatre Ltd. Shree Ashtavinayak Cine Vision Sterling Biotech Ltd. Websol Energy System Ltd. Wanbury Ltd. Tranche I Wanbury Ltd. Tranche II XL Energy Ltd. Zenith Infotech Ltd. 36.3 26.6 40 320.55 0 0 7.25 0 May 18, 2012 Dec. 27, 2012 Oct. 12, 2012 Nov. 29, 2012 Oct. 23, 2012 April 25, 2012 Dec. 01, 2012 March 27, 2012 May 19, 2012 June 21, 2012 June 21, 2012 Feb. 06, 2012 April 28, 2012 March 29, 2012 Feb. 27, 2012 July 04, 2012 Dec. 22, 2012 May 16, 2012 Nov. 01, 2012 April 23, 2012 Dec. 17, 2012 Oct. 23, 2012 Aug. 17, 2012 379 224 15.8 9 3 34 175.7 32.7 0.1 0.5 0.1 0.4 165 565 53 11.1 81 7.9 11 6 14 9.3 8.9 21.4 1.3 2.4 0.9 1.1 2.1 0.7

16.38 60.98 30 31.63 111.58 61.45

0 0 0 1.00 2.00 0

N.A. 72 48.9 to 65 350 N.A. 363.9

0.5 31.2 4.9 17.5 62.6 9

341 8 85 60 35 8

(25.6) 24.9 9.6 (21) 13.6 (82.6)

(2.9) 2.9 5.5 (0.5) 0.9 (0.2)

(0.2) 1.9 1.3 (0.3) 0.7 (0.1)

59.93

8.23 16.41

0 0

17.34 76.1

0 0

236.5 469

81 16.3

28 84

12.4 16.5

0.9 1.7

0.7 0.6

122.56 27.34

1.75 2.88%

454 8.9

N.A. 3.9

153 40

3.6 1.9

N.A. 10

N.A. 6

183.84 22.05 14.41 12.66 46.6

0 0 1.00 1.00 0

163 540 175 138 260 310.4

6.5 8.6 17.5

25 37 14

6.4 (3) (12.9)

2.4 (4.9) (1.2)

1.8 (3.3) (0.9)

4.1 35

26 66

(23.6) 6.3

(1.7) 2.9

(0.9) 1.5

46.7 Variable

N.A.--Not available. Source: Bloomberg.

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Related Criteria And Research

Principles Of Credit Ratings, Feb. 16, 2011 Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010 Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009

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