11 Jan 2012

Is Reliance Comm India's next corporate debt domino?

India's shining corporate stars, like Reliance Communications, Tata Steel and Suzlon Energy, among others, sold convertible bonds - many of them Foreign Currency Convertible Bonds (FCCB) - to finance 'growth'. (Convertible Bonds are bonds that can be converted into the issuing company's equity or into cash at an agreed price.)

Reliance Communications, India's second largest telecom company, has $925 million in convertible bonds coming due on 1 March 2012. The problem, however, is that its shares are trading around 88% below the bond conversion price... This means that in less than 50 days, the company may have to repay nearly $1 billion - possibly, in cash that it doesn't have!

The title of the latest post on oft-quoted investment advisor, Mike Shedlock's (Mish's) Global Economic Trend Analysis blog is interesting... "Debt Trap Looms in India on Convertible Bonds; Borrowing Costs May Quadruple for Indian Corporations"

Mish quotes Bloomberg...
Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world’s 10 biggest stock markets.

But according to moneycontrol.com, the actual redemption value facing India Inc is a "whopping $7.2 billion", with stock prices of "almost 90% of (them) significantly below conversion prices."

So besides having one of the worst performing stock markets... and the worst performing currency (falling about 20% against the USD since mid-2011)... India also has the dubious honour of a corporate sector that's holding its highest foreign currency debt ever!

But wait, the bad news isn't over...

According to analysts’ estimates compiled by Bloomberg, corporate earnings in India are expected to see the biggest drop in three years in the Financial Year ending March 2012!

One bond trader in London put it ever so eloquently: “(Indian) Companies are heading into a debt trap...”

Funny, how neither India's exalted (double doctorate) professor nor his "chief economic advisor" saw this one coming when they were cheerleading the nonsensical notion of 'double-digit GDP growth'!

Last heard on Reuters, Reliance Comm was in talks with state-owned China Development Bank (CDB) for a loan at a higher interest rate to - ahem, repay the earlier loan.

The company is also looking to hawk-off some 50,000 microwave towers for around $3 billion to pay off part of its "$6.5 billion in net debt" as on 31 September 2011!

By the way, if I were a member of the Chinese Politburo, I'd advise the CDB to stall negotiations till mid-February when Reliance Comm share prices would plunge lower - and then arrange for the Red Army to purchase 50,000 'listening posts' in India at a bargain basement price.

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