Convertibles Redeemed as Dollar Costs at Year Low: India Credit

The lowest Indian dollar borrowing costs in a year will help as companies from Tata Steel Ltd. (TATA) to Jaiprakash Associates Ltd. (JPA) refinance $1.2 billion of convertible debt due this quarter.

The extra yield investors demand to buy dollar-denominated Indian bonds over U.S. Treasuries fell to 448 basis points on Aug. 10, the lowest since August 2011, HSBC Holdings Plc indexes show. That’s higher than the 335 basis points for Chinese notes and 289 for Indonesian issuers. Suzlon Energy Ltd. (SUEL), JSW Steel Ltd. (JSTL) and Rolta India Ltd. (RLTA) all used bank loans to redeem $887 million of debt in the past six weeks.

Indian companies sold $2.25 billion of dollar bonds this quarter, 16 times the preceding three months’ issuance, as global central banks ensure ample cash supply to counter slowing economic growth. Companies defaulted on $315 million of debt this year after the 22 percent slump in the benchmark Sensitive Index (SENSEX) from its peak in November 2010 pushed shares below levels at which the notes could be converted to equity.

“It’s a better environment for companies to borrow overseas because global rates are at record lows and there’s comfortable liquidity around the world,” Raj Kothari, a London- based fixed-income trader at Sun Global Investment Ltd. said in an Aug. 10 telephone interview. “Refinancing is the only option for companies to repay this convertible debt.”

Borrowing Costs

International borrowing costs have declined after monetary authorities from the European Central Bank to the People’s Bank of China cut benchmark interest rates this quarter, and the Bank of England increased the size of its asset-purchase program. The Federal Reserve said this month it will provide additional accommodation as needed.

The average yields on dollar bonds of Indian issuers touched 5.08 percent yesterday, the least since Aug. 5, 2011, according to HSBC indexes. The lowest overseas borrowing costs in a year and rupee interest rates at the highest level among the biggest emerging markets are attracting dollar-denominated issuances.

State Bank of India and Export-Import Bank of India last month sold the first dollar debt by local companies since February. Indian Overseas Bank (IOB) sold $500 million of 5 1/2-year notes yesterday, according to to data compiled by Bloomberg.

“Spreads have narrowed on expectations of more monetary easing globally,” Atul Gharde, a Hong Kong-based credit analyst at SJS Markets Ltd., said in phone interview yesterday. “This will be positive for companies that enjoy top credit ratings to borrow overseas, but fears of a sovereign downgrade linger.”

Downgrade Risk

Ten-year borrowing costs for companies rated AAA by Crisil, the Indian unit of Standard & Poor’s, fell one basis point to 9.48 percent on Aug. 10. Yields have declined from about 9.60 percent on April 4, the highest level in 2012.

S&P lowered India’s sovereign credit outlook to negative from stable on April 25, saying there is a one-in-three likelihood of a rating downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade.

Credit-default swaps on State Bank, which investors consider a proxy for the sovereign, fell 70 basis points in 2012 to 325 in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.

Bonds, Rupee

The yield on the benchmark 10-year sovereign bonds has fallen about 33 basis points this year. The yield on the 8.15 percent note due June 2022 rose three basis points to 8.23 percent as of 9:30 a.m. in Mumbai, according to the central bank’s trading system.

The rupee, which declined 8.6 percent in the quarter through June in the worst performance in the region, fell 0.5 percent to 55.6250 per dollar today.

Indian companies are redeeming a record $5.3 billion of convertible debt this year, according to data compiled by Bloomberg. The debt was sold in the three-year period from 2005 to 2007, when the Sensitive Index tripled in value.

Jaiprakash and Tata Steel, the South Asian nation’s largest maker of the alloy, account for 83 percent of the notes maturing by Sept. 30, data compiled by Bloomberg show.

Tata Steel has $471 million of debt maturing on Sept. 5. The Mumbai-based company’s shares are at 403.4 rupees, 45 percent less than its conversion price of 730.5 rupees.

Tata Steel

“We do not plan to raise debt,” Tata Steel Spokesman Charudatta Deshpande said in an e-mail yesterday. “We have adequate liquidity.”

Jaiprakash, developer of India’s only Formula One track, has $524 million of zero-coupon dollar notes maturing Sept. 12. The construction company’s shares closed at 75.15 rupees yesterday compared with its conversion price of 165.17 rupees.

“We will pay mainly by internal accruals much before the due date,” a spokesman for Jaiprakash Associates said in an e- mail yesterday.

Suzlon, India’s largest wind-turbine maker, borrowed $300 million from 11 lenders including State Bank of India (SBIN) to repay its dollar-denominated convertible debt last month, a person with direct knowledge of the matter said on July 27. The company redeemed $360 million of debt, Chief Financial Officer Kirti Vagadia said in a statement the same day. Mumbai-based JSW Steel redeemed $392 million of debt, while Rolta repaid $135 million of bonds, according to stock exchange filings.

JSW Steel, Rolta

JSW Steel had made funding arrangements for the repayment, Chief Financial Officer Seshagiri Rao by telephone on June 22, without elaborating. Rolta said in a March 26 statement that it had arranged a loan to redeem the debt due in June.

“It’s a comfort for those companies that operate in a dollar environment to borrow,” Taina Erajuuri, a money manager at FIM Asset Management, which oversees about $1.2 billion in Helsinki, said in a phone interview yesterday. “There are high expectations on central banks globally and future issuances will depend on how the euro-zone crisis plays out.”

To contact the reporters on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net; Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Darren Boey at dboey@bloomberg.net

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