Let’s turn our focus on a different country today, and ponder the plight of Indian convertible bonds.

Bloomberg reports Debt Trap Looms in Convertibles Due After 25% Sensex Plunge

Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world’s 10 biggest stock markets.

Reliance Communications Ltd., Suzlon Energy Ltd. (SUEL) and Tata Steel Ltd. (TATA), sold a third of the total debt, according to data compiled by Bloomberg. Their shares are trading as much as 88 percent below the bond conversion prices. Should they choose to issue debt that can’t be converted into equity to meet repayments, companies will face an average yield of 6.92 percent on dollar-denominated bonds, a HSBC Holdings Plc index shows, compared with 1.55 percent on convertible notes, according to Barclays Capital data.

“Companies are heading into a debt trap,” Raj Kothari, a convertible bond trader at Sun Global Investments Ltd., said in a phone interview from London on Jan. 4. “Companies have no option but to repay the debt.”

Cash levels for Indian borrowers relative to their interest commitments fell to a five-year low after the central bank raised interest rates a record 13 times since March 2010 to combat inflation and as operating profits declined, Standard & Poor’s Indian unit Crisil Ltd. (CRISIL) said in a report this month. Corporate earnings will probably post the biggest drop in three years in the financial year ending March, according to analysts’ estimates compiled by Bloomberg.

Reliance Communications, India’s second-largest mobile- phone operator, is due to repay $925 million of convertible debt on March 1, the largest amount by any Indian company this year, according to data compiled by Bloomberg.

All except for $116 million of the bonds due this year were sold before 2008, according to data compiled by Bloomberg, as investors were attracted by the Sensex trebling in value in 2006 and 2007.

“Equity prices have gone below the conversion prices on convertible bonds,” Samir Shah, head of technical analysis at BP Equities Pvt. said in a phone interview from Mumbai on Jan. 6. “There’s no option for companies but to repay the debt.”

Mike “Mish” Shedlock
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