Two thirds of the $1.5 billion worth of foreign currency convertible bonds (FCCBs) due for redemption for the rest of FY13 (till March 2013), are expected to either default or restructure, according to a unit of rating agency Fitch.

In an update to its special report ‘Indian FCCB Redemptions in 2012’, dated February 2012, India Ratings & Research a unit of Fitch, says that the FCCB redemption performance till date is broadly in line with its initial expectation. Of the $6 billion FCCBs belonging to 45 companies due between March 1 and Oct. 15, around 66.5 per cent of the outstanding FCCBs comprising 19 companies were redeemed on time.

Additionally, three companies redeemed their dues fully, however, within two months after the due date. Most of the companies refinanced their FCCBs either through foreign or domestic debt or through issuance of fresh FCCBs. Only five companies have used any internal accruals to redeem FCCBs.

India Ratings expects the interest coverage ratios of the companies that used debt to refinance FCCBs to deteriorate by 15 per cent-25 per cent from the current levels.

Of the 26 companies that had defaulted on FCCBs on due date, three companies redeemed FCCBs post due date through cash while investors in four companies converted FCCB into equity at a conversion price much lower than the original conversion price. Redemption still is due for 19 companies that had defaulted on FCCBs. Such obligations are around 21.4 per cent of the total redemption value between March 1 and Oct. 15.

For these 19 defaulted/restructured FCCB cases, India Ratings has estimated recovery rates and potential time to recovery considering contractual and structural subordination, expected liquidation value, economic motivation of sponsor and operational viability of the underlying business.

FCCB holders in 12 companies may expect below average recoveries in the range of up to 30 per cent with an average recovery span of at least five years. Of these 12 companies, six companies or their subsidiaries went under corporate debt restructuring and six defaulted on their local currency obligations. For the remaining seven companies, India Ratings expects above-average recovery of 30-70 per cent with an average recovery span of three to five years.

(Edited by Prem Udayabhanu)

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