These Vanishing Convertible Bonds Show Modi's Funding Challenge

  • Just one company has issued foreign currency notes this year
  • Firms defaulted on almost half of convertibles due in 2015

Only one Indian company has sold foreign-currency convertible bonds this year. Rising debt defaults, a stock-manipulation dispute and stalled reforms aren’t inspiring confidence for 2016.

Issuers defaulted on $140 million of notes exchangeable into shares this year, or about 42 percent of the total redemptions due, adding to $105 million in 2014, according to data compiled by Bloomberg. Bondholders of Castex Technologies Ltd. in July claimed the auto parts maker’s share price was inflated to trigger conditions for a conversion of $137 million of foreign-currency debt into equity.

Prime Minister Narendra Modi needs to win back foreign investors’ trust in corporate India as opposition parties stall his economic policies including a land ownership overhaul. Waning interest in convertible bonds means one less funding avenue as the stock market heads for its first loss in four years and delinquencies slow bank lending.

“It’s been a very difficult experience for investors in the past as a large number of convertible issuers ran into difficulties servicing the debt. This was further compounded by corporate governance issues,” said Arup Ganguly, managing partner at London-based KNG Securities LLP. “The international community of investors are somewhat disappointed with the speed of reforms.”

Prakash Industries Ltd. was the sole Indian issuer of foreign-currency convertibles this year, with a $17.85 million note. Sales fell 98 percent from last year to the lowest since at least 2004, according to data compiled by Bloomberg. Outstanding convertibles from the nation returned 4.7 percent through November, compared with 12.2 percent for Hong Kong and 5.7 percent for the Asia-Pacific region, Barclays Plc indexes show.

Castex’s share price soared from the end of March until reaching a threshold that triggered a mandatory conversion of foreign-currency debt into equities. India’s market regulator, which is probing the unusual movements, said in November it hadn’t yet found any signs of wrongdoing. The company didn’t answer to two phone calls and an e-mail seeking comments.

Sagging confidence in Indian convertibles wasn’t helped by widening global credit spreads amid the prospect of the first Federal Reserve tightening in almost a decade. The U.S. central bank on Wednesday set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent, and said the move would be followed by “gradual” tightening.

“Subdued issuance in India has followed a global trend in 2015, hampered by a mixture of heightened volatility in equity markets and, until recently, low financing costs in the U.S. dollar high-yield space,” said Dorian Carrell, a Singapore-based fund manager at Schroder Investment Management Ltd. He expects dollar convertibles from good quality Indian issuers to be well received.

Price Caps

Foreign-currency sales could pick up next year if pricing restrictions are relaxed, said Joseph K Mammen, managing director at Elara Capital (Asia) Pte. Central bank rules state that issuers can’t sell three-to five-year debt abroad with an all-in cost of more than 300 basis points over the London interbank offered rate and 450 basis points for notes with tenors of more than five years.

Modi is planning to overhaul bankruptcy laws that date back a century to slash the time it takes to wind up a dying company or recover dues from a defaulter. Creditors in India recover 25.7 cents on the dollar in the 4.3 years that it takes to resolve insolvency, World Bank data show, compared with 80.4 cents in the U.S. after less than half that time.

Substantial economic reforms need to be achieved in India to spike interest in foreign-currency convertibles, whose performance is largely driven by underlying equities, according to BNP Paribas Asset Management. India’s benchmark S&P BSE Sensex Index has fallen about 7 percent in 2015 and is poised for the first annual decline in four years. 

“I do not expect much convertible bond issuance out of India given the persistent cap on all-in financing costs in a context of widening credit spreads and the lack of corporate governance,” said Skander Chabbi, the Paris-based head of convertibles at BNP Paribas. “At this time, positive catalysts are lacking in order to trigger a rise in issuance.”

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