Corporates

India

Update of Indian FCCB Redemption, FY13

Redemption Stress Expected to Aggravate
Update
Results as Expected: In line with India Ratings expectation, 66.5% of foreign currency convertible bonds (FCCBs) maturing between 1 March 2012 and 15 October 2012 and belonging to 19 companies were redeemed on time. Three companies (8.9% of FCCBs due) redeemed their dues fully, however, within two months after the due date. During the period, FCCBs amounting to an estimated USD6.0bn belonging to 45 companies had matured (Details in Table: Redemption Update). As per India Ratings estimate in February 2012, 70% of the maturing amount was expected to be redeemed on or before maturity date. (refer: Indian FCCB Redemptions in 2012, February 2012). More Pain Ahead: For the rest of FY13 (upto March 2013), FCCB redemption amount of USD1.51bn belonging to 23 companies is due. India Ratings expects that 67% of the outstanding dues belonging to 17 companies are unlikely to be redeemed on time. These may be restructured or go into outright default. Redemption Driven by Refinancing: Of the 19 companies which successfully redeemed FCCBs, only five companies had used any internal accruals. The remaining 14 companies had used loans foreign currency or domestic loans or fresh FCCB issuance to redeem the outstanding FCCB. Credit Impact of Redemption Mode: India Ratings considers FCCBs (including redemption premium) as debt for the purpose of leverage calculation. To the extent debt (or fresh FCCB issuance) was used for refinancing FCCBs, overall leverage levels largely remain unaffected, however interest coverage (for companies using debt) is expected to deteriorate by 15%-25% from the current levels. Most FCCBs have low (sometimes zero) coupon payments. Non-Redeemed FCCBs: 26 companies defaulted on FCCB repayment of the 45 companies due for redemption. Of these 26 companies, three companies subsequently redeemed their outstanding FCCBs through cash. Additionally, investors in other four companies converted FCCBs into equity at a conversion price much below the initial conversion price. The remaining 19 companies constituted 21.3% of the outstanding FCCB amount. Recovery Estimates: India Ratings estimates that of the 19 companies that have defaulted on FCCBs or restructured them, 12 may expect a recovery in the range of 0% to 30% with a median recovery period of around five years. In the remaining seven cases, the recovery may be 30% to 100% in three to five years. The recovery estimates are driven by the expected liquidation value, operational viability of the underlying business and economic motivation of promoters.

Figure 1

Redemption Update (1 March 2012 to 15 October 2012)

Category Redemption on due date Redemption after due date Conversion into equity post restructuring Default/Nonredeemed/ outstanding default/ restructured Number of companies 19 3 4 % Outstanding 66.5 8.9 3.3

19

21.3

Source: India Ratings, Bloomberg and Company reports

Related Research
Corporate Rating Methodology (September 2012) Distressed Debt Exchange (September 2012)

Analysts
Amey Joshi +91 22 4000 1794 amey.joshi@indiaratings.co.in Deep Mukherjee +91 22 4000 1721 deep.mukherjee@indiaratings.co.in Rakesh Valecha +91 224 000 1740 rakesh.valecha@ indiaratings.co.in

www.indiaratings.co.in

7 November 2012

Corporates
Performance till Date
Between 1 March 2012 and 15 October 2012, FCCB amounting to USD6bn belonging to 45 companies were due for redemption. India Ratings in its report Indian FCCB Redemptions 2012, dated 22 February 2012, had expected 70% of the outstanding FCCB amount to be redeemed on time. Timely redemption was observed for 66.5% of the outstanding FCCBs. An additional 8.9% of the outstanding amount, belonging to three companies, was fully redeemed within two months post due date. These three companies are Suzlon Energy Ltd (June Tranche), KSL and Industries Ltd and Hotel LeelaVenture Ltd The marginally lower-than-expected timely redemption may be attributable to significant deterioration in the macro-economic environment which affected the liquidity and funding access of several companies. Indias quarterly GDP growth rates ranged between 5.3% and 5.5%, figures significantly below the trend growth rate. During the same period, the Indian Rupee depreciated from INR49/USD to in the range of INR54/USD to INR56/USD, which adversely affected the debt servicing ability of some companies.

66.5% FCCB Dues Redeemed on Time

19 companies, constituting 66.5% of FCCB amount successfully redeemed FCCBs on time. In this group, two companies (Strides Arcolab Ltd (Long term Issuer Rating IND BBB+/Stable) and Bharat Forge Ltd) had used internal accruals for redemptions. Three companies (Tata Motors Ltd, Tata Steel Ltd (Long term Issuer Rating IND AA/Negative) and Jaiprakash Associates Ltd) had used a combination of internal accruals and debt financing for FCCB redemption. The remaining 14 companies had primarily used debt or fresh FCCB issuance to redeem FCCBs. India Ratings considers FCCB as debt for calculation of leverage. Thus refinancing FCCBs with debt or further FCCB issuance is unlikely to affect leverage. However, majority of the FCCBs had zero coupons or very low coupon rates in the range of 1.0% to 4%. Therefore, the immediate impact of refinancing FCCBs using debt is a significant increase in interest expense. Foreign currency debt, typically in the form of external commercial borrowing, requires at least a semi-annual coupon payment. Given the last reported financial numbers of the companies in this group, interest coverage is expected to deteriorate by 15% to 25%.

Redemption/Conversion outside the original terms

Three FCCB issuers redeemed their dues post due date. Two of the three such FCCB issuers namely Suzlon Energy Limited and Hotel LeelaVenture Ltd first restructured their obligations by extending its maturity and subsequently redeemed them through external funding and proceeds from selling of fixed assets, while KSL and Industries paid its FCCBs to terminate winding up litigation from bond holders. Another four companies converted FCCBs into equity at conversion rate much lower than the initial conversion rate. Of these four companies, three companies namely Surana Industries Ltd, Kamat Hotels India Ltd and Grabal Alok Impex Ltd (now merged with Alok Industries Ltd), converted FCCBs into equity prior to due date. However, for 3i Infotech the conversion into equity happened after the FCCB due date (these are part of the 4 entities or 3.3% of the outstanding FCCB).

Recovery Estimates of Restructured/Defaulted FCCBs

A total of 19 companies defaulted on FCCBs or restructured them. To estimate potential recovery rates and expected time to recovery with respect to the outstanding FCCBs, India Ratings has focussed on four aspects namely a) legal complexity, b) expected liquidation value, c) economic motivation of sponsors and d) operational viability of the underlying business. Legal complexity focuses on the aspect that FCCBs are subordinate and unsecured debt (with

Update of Indian FCCB Redemption, FY13 November 2012

Corporates
Figure 2

Year Wise Recovery

More than 5 Years 33% Less than 3 Years 22%

Between 3-5 Years 45% Source: India Ratings

respect to bank loans) and held by investors which, unlike domestic banks, are not armed with security enforcing regulations such as The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI). In the event, the FCCB issuer is already in corporate debt restructuring (CDR) initiated by domestic banks, the FCCB investors may not become a beneficiary of the restructuring package easily. To the extent the FCCB issuer is already delinquent with its domestic lenders (but not in CDR till date), the same legal complexity may arise. Investors of defaulted FCCBs, who have not entered into subsequent distressed debt exchange/restructuring, tend to pre-emptively file for winding up of the issuer. However, for defaulted FCCB issuers with a low expected liquidation value or low economic motivation of the promoters, investors are unlikely to receive any meaningful recovery. Expected liquidation value estimates the residual value for an FCCB investor in the event of actual winding up or liquidation of the defaulted FCCB issuer, given that banks with first charge, on the assets of the issuer, are likely to capture most of the value. An expected liquidation value (secured debt/total monetizable asset and total debt/total monetizable asset) significantly above 1.0 suggests that a negligible residual value would remain for FCCB holders after secured debtors have been paid. Economic motivation of sponsors becomes particularly important for those distressed companies which have very high gearing ((Total Debt/Total Equity) (above 2.0)) and where the sponsors has already pledged a significant portion of their stake. Additionally, if the expected liquidation value is low in the event of limited operational viability of the underlying business, the sponsors may not have strong motivation to infuse additional capital to potentially turnaround the business.
Figure 3

Recovery Estimates: Issuers or Major Subsidiaries are in CDR

Name Moser Baer India Ltd (CDR)c Murli Industries Ltd (CDR) Wanbury Ltd(CDR) Pioneer Embroideries Ltd (CDR) ICSA India Ltd(CDR) KLG Systel Ltd(CDR)
a

Status CDR CDR CDR CDR CDR CDR

Expected liquidation value a Moderate Moderate Low Very Low Very Low Moderate

Economic motivation of promoter Moderate Economic Motivation Moderate Economic Motivation Moderate Economic Motivation Moderate Economic Motivation Limited Economic Motivation Moderate Economic Motivation

Operating viability b Limited Stress Severe Operating Stress Severe Operating Stress Severe Operating Stress Severe Operating Stress Severe Operating Stress

Expected Recovery rate recovery time (years) d (%) 3 to 5 Average 5 Plus 5 Plus 5 Plus 5 Plus 5 Plus Below Average Insignificant Insignificant Insignificant Below Average

Expected liquidation value: secured debt/total monetizable asset and total debt/total monetizable asset. A high liquidation value implies that the two ratios have a value below 1.0. A value of 1.0 to 1.5 implies moderate liquidation value, 1.5 to 4.0 a low liquidation value and above 4.0 implies a very low liquidation value b India Ratings has considered a year on year (FY11 and FY12) change in EBITDA. A %change above 10% indicates limited operating stress. A value between 0% to 10% indicates moderate operating stress. A value between 0 to -10% indicates significant operating stress and any value below -10% suggest severe operating stress. c Major Subsidiary Moser Baer Solar Limited is in CDR
d

Recovery rate: Above average >50%, average- 30%-50%, below average: 10%-30%, insignificant- <10%) Recovery rate + Principal recovered / Principal outstanding (including redemption premium) Source: India Ratings and latest available company reports

Issuers (Or Major Subsidiary) in CDR: In this group, there are six FCCB issuers who or their major subsidiary(s) are under CDR. With the exception of Moser Baer India Limited, most of them are under severe operating stress as reflected by the sharp deterioration in their

Update of Indian FCCB Redemption, FY13 November 2012

Corporates
operating cash flows and are unlikely to turnaround operationally in the next three to five years. While the CDR process may potentially delay the recovery for FCCB investors, the deteriorating operating conditions of these six companies significantly reduces the likelihood of any meaningful recovery amount for the FCCB holders. If the company is under CDR or has defaulted on the domestic banking facilities (as reflected in their annual report), the FCCB investors may expect very limited recovery. FCCBs post conversion into debt would be treated as unsecured debt and would be subordinate to bank loans. Issuers with Delays/Default on Domestic Bank Loans: In this group, there are five FCCB issuers who had delayed debt servicing or defaulted on domestic bank loans. Issuers in this group have a very high likelihood of entering into some form of restructuring depending on their financial conditions. This group is characterised by high financial leverage ((Total Debt Net of Cash/Operating EBITDA) (average 9.5x for FY12)). Debt servicing would be a challenge given the present economic situation. However, some issuers (Suzlon Energy Ltd, Great Offshore Ltd and Pokarna Ltd) exhibit robust operating performance, and thus a higher propensity to operationally turnaround (even if they subsequently enter CDR), if economic situations improve. With the exception of Prithvi Information Solutions, most companies in this group are likely to show an average recovery rate (30%-50%). The recovery rate is driven by either a high expected liquidation value or a higher likelihood of operational improvement (such as Great Offshore Ltd and Suzlon Energy Ltd). The highest recovery (50%-100%) may be expected from Great off Shore driven by a high expected liquidation value and moderate-to-high economic motivation of the promoters.
Figure 4

Recovery Estimates: Issuers With Delays/Defaults on Domestic Loans

Expected liquidation value Very Low Economic motivation Operating of promoter viability Limited Significant Stress Moderate to Severe High Operating Stress Moderate to Significant High Stress Limited to Moderate Moderate Limited Stress Limited Stress Expected recovery time Recovery (years) rate(%) Insignificant 5 Plus

Status Domestic Loan Delay + FCCB Default/ Restructured Sterling Biotech Ltd Domestic Loan Delay + FCCB Default/ Restructured Great Offshore Ltd Domestic Loan Delay/Default + FCCB Default/ Restructured Pokarna Ltd Domestic Loan Delay/Default + FCCB Default/ Restructured Suzlon Energy Ltd Domestic Loan Delay/Default + FCCB Default/ Restructured

Name Prithvi Information Solutions

High

3 to 5

Average

High

<3

Above average Average

Moderate

3 to 5

Low

3 to 5

Average

Source: India Ratings and latest available company reports

Issuers with Default/Restructured FCCBs: In this group, there are six FCCB issuers who had defaulted on and/or restructured FCCB payments. Also, as per publicly available information, there are delays/default with respect to domestic bank loans. Given the operating performance and leverage levels Tantia Construction, SuryaJyoti Spinning Mills and Subex Ltd.

Update of Indian FCCB Redemption, FY13 November 2012

Corporates
may be vulnerable to deterioration in credit profile.

Figure 5

Recovery Estimates : Issuers With Default/Restructured FCCBs

Expected liquidation value Very High Very High Very Low Moderate Very High Very Low Low Low Economic motivation factor Moderate Economic Motivation Moderate Economic Motivation Moderate Economic Motivation Moderate Economic Motivation Limited Economic Motivation Limited Economic Motivation Limited Economic Motivation Limited Economic Motivation Operating viability Limited Stress Limited Stress Limited Stress Severe Operating Stress Limited Stress Significant Stress Significant Stress Severe Operating Stress Expected recovery time Recovery (years) rate (%) <3 Above average <3 3 to 5 3 to 5 <3 3 to 5 3 to 5 Above average Below average Below average Above average Below average Below average Insignificant Insignificant

Name Tulip Telecom

Status FCCB Default/ Restructured

Micro Technologies FCCB Default/ Restructured Tantia Construction FCCB Default/ Restructured Suryajyoti Spinning FCCB Default/ Mills Ltd Restructured Shri Lakshmi Cotsyn Ltd Subex Ltd Gemini Communications Ltd Zenith Infotech Ltd(Court Case) Pyramid Saimira Theatre Ltd (Scrip Suspended) FCCB Default/ Restructured FCCB Default/ Restructured FCCB Default/ Restructured Regulatory/Legal Regulatory/Legal

Source: India Ratings and latest publicly available Company Reports Figure 6

Expected Performance
Category Likely to redeem Likely to restructure/ default Number of % Outcompanies standing 6 33 17 67

Expected Performance
Between 16 October 2012 and 31 March 2013, 23 companies are due to redeem FCCBs amounting to USD1.56bn. This section analyses the likelihood of redemption of these FCCB. India Ratings in its report dated 22 February 2012 considered FCCBs which were due for payment between February 2012 and December 2012. A set of 15 companies (whose FCCBs are due between October 2012 and December 2012) were found to be common for the two redemption periods. Of the 15 companies, the agency has revised redemption expectations for three companies to likely to restructure/default from likely to redeem. These companies are Easun Reyrolle Ltd, Websol Energy System Ltd, and Plethico Pharmaceuticals Ltd. Thus, India Ratings expects an estimated 67% of the total FCCB obligations due between 15 October 2012 to 31 March 2013 to not be redeemed on due date. This will include 17 companies.

Source: India Ratings, Bloomberg and Company reports

Update of Indian FCCB Redemption, FY13 November 2012

Corporates
Annexure 1: Expected Performance
Figure 7

Likely to be Redeemed: Most Financing Options Available

Issuer name Coupon Jaiprakash Associates Ltd 0.5 Prime Focus Ltd 0 Pidilite Industries Limited 0 Maturity 9 Mar 2013 13 Dec 2012 07 Dec 2012 Redemption premium 132.1 143.63 139.37 Redemption amount (in USD m) 0.33 78.99 51.84 Yield to maturity Ratings n.a. 70.38 IND BBB/Stable n.a.

Source: India Ratings and Bloomberg

Figure 8

Likely to be Redeemed : More Likely to Access High-Cost Domestic Funding

Issuer name Geodesic Limited Sharon Bio-Medicine Ltd Sintex Industries Ltd Coupon 0 0 0 Maturity 18 Jan 2013 4 Dec 2012 13 Mar 2013 Redemption premium 138.4 141.22 122.5 Redemption amount Yield to (in USD m) maturity Ratings 157.1 129.85 23.3 n.a. 275.6 13.70

Source: India Ratings and Bloomberg

Figure 9

Imminent Default/Low Recovery

Issuer name Ankur Drugs & Pharma Ltd Vardhman Polytex Ltd Wanbury Ltd GV Films Ltd Aksh Optifibre Ltd Aksh Optifibre Ltd Sancia Global Infraprojects Ltd* Easun Reyrolle Ltd Coupon 0 2 1 0 0 1 1 0 Maturity 27 Dec 2012 19 Feb 2013 17 Dec 2012 23 Oct 2012 8 Jan 2013 5 Feb 2013 13 Feb 2013 5 Dec 2012 Redemption premium 133.02 118.4 139.22 140 139.9 124 137.2 142.56 Redemption amount Yield to (in USD m) maturity Ratings 26.6 n.a. 10.06 n.a. 12.66 n.a. 16.38 27.98 n.a. 9.3 237.46 68.6 n.a. 5.7 n.a.

Source: India Ratings and Bloomberg

*(Previously known as Gremach Infrastructure Equipment and Projects Limited)

Figure 10

Likely to Restructure
Issuer name Bartronics India Ltd Firstsource Solutions Ltd Kinetic Engineering Ltd South Asian Petrochem Ltd** Websol Energy System Ltd Plethico Pharmaceuticals Ltd Shree Ashtvinyak Cine Vision Ltd Coupon 0 0 2 0 0 0 2.875 Maturity 4 Feb 2013 4 Dec 2012 15 Feb 2013 23 Jan 2013 1 Nov 2012 23 Oct 2012 22 Dec 2012 Redemption Premium 143 139.37 119.5 100 131.28 139.39 126.41 Redemption amount Yield to (in USD m) Maturity Ratings 71.5 n.a. 240.13 56.12 21.51 n.a. 7.5 n.a. 22.05 134.77 27.34 n.a. n.a 167.90

Source: India Ratings and Bloomberg **Merged with Dhunseri Petrochem & Tea Ltd.

Update of Indian FCCB Redemption, FY13 November 2012

Corporates
Figure 11

Likely to Restructure With Significant Distressed Debt Exchange Features

Issuer name GTL Infrastructure Ltd Indowind Energy Ltd XL Energy Ltd Coupon 0 0 0 Maturity 29 Nov 2012 22 Dec 2012 23 Oct 2012 Redemption premium 140.41 100 143.59 Redemption amount Yield to (in USD m) maturity Ratings 320.55 1,578.22 IND C 30 n.a. 46.6 n.a.

Source: India Ratings and Bloomberg

Update of Indian FCCB Redemption, FY13 November 2012

Corporates

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
Copyright 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India Ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of United Kingdom, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers.

Update of Indian FCCB Redemption, FY13 November 2012