India Convertible Sales Halt as Funds Bleed on Defaults

Convertible debt sales in India have halted as investors shun the notes in Asia’s worst-performing stock market, with defaults extending 2012’s record.

Issuance of bonds that can be exchanged for shares was zero in 2013, compared with $600 million in 2012 and a record $7.5 billion in 2007, according to data compiled by Bloomberg. That’s the slowest start since 2000, the data show. Convertibles returned 0.27 percent last quarter, the worst performance in the Asia-Pacific after Singapore’s 0.8 percent loss, Barclays Plc indexes show. The region’s average return was 3.8 percent.

“Convertibles are generally issued in bull markets, when there is lot of appetite for equities,” U.R. Bhat, director at Dalton Capital Advisors India Pvt. in Mumbai, said by telephone on April 11. “There is no appetite now. Investors are not optimistic about the equity markets because the economic indicators are not good.”

Three Indian issuers of exchangeable debt defaulted on $241 million so far this year, adding to a record $619 million of non-payments in 2012 that were led by wind-turbine maker Suzlon Energy Ltd. The benchmark S&P BSE Sensex Index of shares slumped 6.3 percent in 2013, while the MSCI Asia-Pacific index gained 5.7 percent, as brokerages forecast falling earnings in the past quarter amid the slowest annual economic growth in a decade.

India’s biggest companies are poised to report the first decline in quarterly earnings in three years. Net incomes for the 30 members of the Sensex may fall 0.8 percent from a year ago in the three months ended March 31, according to estimates compiled by Bloomberg. Kotak Institutional Equities and Religare Capital Markets are among brokerages cutting forecasts.

Forecasts Slashed

Shares in Infosys Ltd., India’s second-largest software services exporter, slumped 21 percent on April 12, the most in a decade, as it forecast annual sales will rise slower than analysts estimated. Bank of America Corp. has slashed its earnings growth projection for Sensex companies for the year ending March 2014 to 10 percent, from 17 percent.

Reserve Bank of India Governor Duvvuri Subbarao cut the benchmark repurchase rate to 7.5 percent from 8 percent in two reductions last quarter, as the government’s statistics agency forecast a 5 percent increase in gross domestic product growth in the fiscal year ended March 31, the weakest since 2003. Industrial production growth slowed to 0.6 percent in February from 2.4 percent in January, while consumer prices gained 10.39 percent in March, the fastest pace among the four largest emerging economies, official data released April 12 show.

Emerging Uncertainties

The rupee weakened about 6 percent to 54.7650 per dollar in the past 12 months as India’s current-account deficit swelled to a record. The shortfall in the widest measure of trade was $32.6 billion in the quarter ended Dec. 31, or 6.7 percent of GDP. The currency fell 0.4 percent today.

Prime Minister Manmohan Singh’s ruling alliance is 44 seats short of parliamentary majority after a key ally pulled out of the coalition last month. This will make it difficult for the government to push through key legislation needed to boost growth.

“We’re not seeing any great recovery in the economy or signs of earnings upgrades,” Sanjeev Prasad, senior executive director at Kotak Institutional Equities, told Bloomberg TV India on April 8. “Investors are naturally evaluating what they need to do in India in the light of emerging political uncertainty, the not-so-great fundamentals of the Indian market and the fact that macro-economic parameters are still looking pretty weak.”

Debt Issuance

Indian companies sold $16.8 billion of convertibles from 2005 to 2007, when the Sensex index more than doubled in value and GDP grew more than 9 percent annually. International equity-linked debt sales touched a two-year high at $26.3 billion last quarter, according to data compiled by Bloomberg. Ninety nine companies sold exchangeable debt in the period, the data show.

Bartronics India Ltd., Geodesic Ltd. and Vardhman Polytex Ltd. failed to repay convertibles in the last quarter, according to data compiled by Bloomberg.

The local convertible market’s collapse contrasts with a record start to the year for sales of coupon-paying dollar notes. Issuers including Bharti Airtel Ltd. and Reliance Industries Ltd. raised $6.3 billion overseas in the three months ended March 31, the data show. State Bank of India, the nation’s largest lender by assets, raised $1 billion of five-year notes at a coupon of 3.25 percent April 11.

Average dollar yields for local companies fell 30 basis points this year, and touched an all-time low of 3.81 percent on March 18, according to HSBC Holdings Plc indexes. Falling yields have also boosted sales of rupee-denominated debt to an all-time high. Local-currency issuance jumped 15 percent to 737 billion rupees ($13.5 billion) last quarter from the preceding three months.

Sovereign Yield

The yield on 10-year government bonds declined nine basis points last quarter, offering an extra 613 basis points over U.S. Treasuries, data compiled by Bloomberg show. The rate on the benchmark 8.15 percent notes due June 2022 fell 2 basis points to 7.85 percent.

The cost of insuring the debt of State Bank of India, considered a proxy for the sovereign by some investors, using five-year credit-default swaps slid 21 basis points this year to 205, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“Convertibles are not being sold as investors prefer coupon-paying bonds,” Hemant Dharnidharka, the head of credit research at SJS Markets Ltd. in Bangalore, said in an April 10 telephone interview. “It serves the company’s interest to sell bonds that pay a coupon, rather than convertibles, as they face no equity dilution on maturity. Most of the convertibles that are maturing since last year were issued when the companies were not ready to pay an upfront coupon every year, and this debt had a redemption price of 1.3 to 1.4 times the face value.”

Bharat, Gitanjali

Bharat Forge Ltd. is among three local companies that need to redeem $90 million of convertibles by the end of the year, according to Bloomberg-compiled data. Outstanding convertible debt declined 44 percent in 2012 as $4.7 billion matured or was reorganized, the data show. Another $4.7 billion of notes are due for repayment by the end of this decade.

Gitanjali Gems Ltd., the owner of jewelry brands Nakshatra, Gili and Asmi, deferred plans to sell convertibles, the company said in an exchange filing March 26. The Mumbai-based company had planned to sell equity-linked notes maturing 2018.

“Fund managers are bleeding on exposure to Indian convertibles and sentiment is very unfavorable because of the defaults,” Raj Kothari, a London-based fixed-income trader at Sun Global Investment Ltd., said in an April 9 telephone interview. “Unless the blue chip companies sell bonds, a revival of the convertible bond market will be tough.”

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