Rupee Impact: ECB & FCCB, repayment due 2012/3

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From a FC  article of two weeks vintage, it becomes clear that not all the $10 bln FCCB debt holders in India ( FC says $8.5 bln outstanding) including Power sector projects, Kingfisher and the others like GMR Infra will be lost when interest payments and outstanding debt eat into their profits as FCCB / ECB debt holders contemplate the sharp fall in the Rupee. From 52.4 right now  which is beyond the March 2009 lows, the rupee can probably not find a range till 55 with many caught  off guard by the pace at which rupee positions had to be liquidated in the market,. Lets hope SCB is also trading the new trend in profits since October 2011.

The 22% fall in the markets this year may see a further breach though the morning’s signs of trying the 4700 levels are encouraging for a falling only market trend. The ECB debt holders have already reported large 300-500 crore losses on their mark to market of Debt in the September quarter, but the silver lining is that players like Reliance Power have actually repaid $300 mln in October itself. The FCCB holders will be asking these companies to pay out on their ECB/FCCB in 2012 alongwith a host of other companies to the tune of $2 bln saving them the atrocities of the currency movement likely to continue in the future right now for the next 6 months given the surprise and the pace of the downward correction this month. Those at extreme risk are the corporates raising fresh “cheap” external debt in October to $2.36 bln incl. GSPC, Mundra Ports and IDFC.

FCCB vs ECB vs Rupee

The overall External Corporate Debt for Indian companies has grown to $30 bln in 2011 till date from just $10 bln last year in 2010 as per an ET report. Most of this addition is however on the short term side and many of the FCCBs which are 1/3 of the Dollar/Euro loan folio are due for conversion by 2012/201 when they will be called by lenders and if repaid as is likely in moist cases, they will not present a problem. The last crop of borrowers had a very different set  of objectives and the problem is unlikely to crop up again as not many envisage default or rollover and when given a chance will repay the loans to cut their losses as borrowing costs of 8-11% a full 200-300 basis points ahead of domestic costs get negated by he 15% adverrse movement in the exchange rate for the rupee (USDINR=X)

Some examples of smaller midcaps who issued high conversion price debt 5 years back like KSL, Sintex, Clearwater Capital for Kamat Hotels have been having much more limited success with resolving with either due repayment in May 2012 (KSL) or conversion approved by lender to 24.5% stake with promoter majority intact in Clearwater case and zenith and then Sintex expected to default after taking a 40 cr hit on earnings (INR 400 mln per GS analysis)

The problem is that 2 in 3 importers are not hedged on their position and likewise the small advantage is that IT companies unhedged on the Dollars earnings and Gems exporters who paid for their imports in Cash are going to add to cash profits to the extent of at least 10% of the 14% movement in the Rupee since July and veven more if the rupee tries to get to 55 quickly

The inflation impact of the rupee depreciation will be hard and fast with Oil holding steady , All in all an impact

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of more than 20% of earnings for those unable to liquidate the external debt on their balance sheets. But new borrowings have been short term heavy in 2011 and those will be purged by 2012 with a 20% of debt position at risk of loss on the interim results / FY2012. Infy has also degraded earnings despite the uptick claimed mostly by unhedged Mid caps and HCL Tech is a big loser as well, with hedging strategies turning upside down and Treasuries sitting on the old ones.