As the Indian and Chinese economies ripen, worms seem to be crawling out of the sweet growth. Post China’s disclosure of ballooning local government debt, news has hit of more than a 100 Indian companies need to repay an estimated Rs 33,000 crore (over US$7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) within the next two years.
The FCCBs have been a widely preferred loan instrument for Indian companies borrowing money from overseas markets, especially during 2006 and 2008 when the stock markets were on a high and allowed the companies to easily tie-up loans which were low-cost, but had equity as a convertible. As the name suggests, the lenders can convert these bonds into equity if the debt is not repaid upon maturity, which is generally five years or more.
However as it turns out, FCCB’s of more than 100 Indian companies are maturing within the next two years, and with limited debt repayment mechanisms and low share prices, many of these Indian companies are looking to Chinese banks to repay the amount. While many companies are already in negotiations with Chinese banks due to their lower interest rates, post yesterday’s announcement of a high default rate on Chinese banks, many analysts also fear the ability of Chinese banks to bail Indian companies out.
An added benefit for Indian companies taking loans from Chinese banks is the possibility of buying materials at a lower cost from China. Companies from power and other infrastructure related sectors are especially interested in Chinese loans, as they may get concessional rates if they agree to other import-related relationships with China’s manufacturing companies.
Indian companies can get very low-cost loans from Chinese banks if they also agree to source other products from that country. The Chinese loans are also catching the fancy of those corporates who do not face any FCCB redemption risk, but are looking to retire their existing costlier loans. Some of the Indian firms having taken cheaper Chinese loans previously include two Anil Ambani group firms, RCOM and Reliance Power, who together tied up about US$ 3 billion worth loans from China.
Reliance Power is said to have saved about Rs 6,500 crore in interest costs when it tied up US$ 1.1 billion (over Rs 5,000 crore) of Chinese loans, which was used to repay costlier domestic loans. A host of power companies such as Lanco Infratech , Moser Baer Power and Adani Power have also previously expressed their interest in Chinese loans.
As per RBI data, FCCBs worth about US$ 3.5 billion are maturing in the current fiscal 2011-12, while FCCBs worth about US$ 4 billion would mature in 2012-13. Things could improve thereafter with FCCB maturing worth about US$ 627 million in 2013-14, US$ 2.5 billion in 2014-15, US$ 467 million in 2015-16 and only US$ 25 million in 2016-17.