SUBEX LIMITED 
By 
MUMBAI (Reuters) - When promising tech company Subex (>> Subex Ltd.) sold $180 million in five-year convertible bonds in March 2007 to fund the acquisition of a Canadian technology company, India was at the height of an unprecedented market boom.
The economy was growing at more than 9 percent a year, the Indian rupee was rallying towards a record high against the dollar and the Bombay Stock Exchange's main index <.BSESN> had surged six-fold in the previous five years, even trumping the performance of China's much vaunted Shanghai stocks.
Today, India and Subex face a different reality altogether. The stock market has dropped by a fifth from the end of 2007 and the rupee in recent weeks has hit successive record lows - a costly combination for Indian companies which together face foreign currency convertible bond redemptions this year of nearly $5.5 billion.
"There will be some casualties," said Jacques Berghmans, a Brussels-based India convertibles manager with TreeTop Asset Management, which looks after about 1 billion euros in assets. "Some of the companies are already over-leveraged and they will find it tough raising fresh funding in this market," he said.
Investor fear about the fate of the euro zone is the latest factor to have hit confidence in India, undermining the currency.
But investors have raised a number of India-specific red flags to explain why the rupee is the biggest losing currency this year in Asia among those monitored daily by Reuters, including a swelling current account, heavy government spending particularly on subsidies such as oil, a rash of unpredictable regulations and tax and a coalition that is struggling to push through any reforms to bolster an economy now growing at just above 6 percent.
The slide in the stock market meant the conversion prices for many of the convertible bonds was much higher than the market price of the issuer.
The dollars to pay off investors are also much more expensive. The rupee has dropped some 30 percent from its record high to its record low.
Fitch Ratings predicted in a report in February that about half of the 55 companies with maturing foreign currency convertible bonds (FCCBs) in 2012 were at risk of some type of restructuring or default.
In addition, with the government stuck in policy paralysis ahead of national general elections that must be held by 2014, overseas lenders could become more wary in general of Indian companies, which raised $30 billion in external commercial borrowings in 2011.
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THE SUBEX EXPERIENCE
The combination of economic factors dragging on India, in particular a fiscal deficit estimated at almost 6 percent of GDP for the year to March 2012, has already prompted Standard & Poor's ratings agency to downgrade the outlook for India's credit rating, which stands just one notch above junk status.
A cut in the rating would raise borrowing costs across the board, adding to the premium lenders would demand from companies such as Subex in return for their capital.
It would also raise further doubts about India's position in the so-called BRICS of Brazil, Russia, India, China and South Africa, a grouping that represents the emerging markets challenging the world order so long dominated by North America and Europe. As India's credit rating is under pressure for a downgrade, rival Indonesia is on the up. Many see it as the new ?I' in BRICS.
Subex is a typical example of the problems many Indian companies face, said analysts, bondholders and executives of companies with overseas holdings.
Started as a provider of software products and services to global telecom companies, it faced a promising future in 2007. More recently, it has suffered from cutthroat competition and sluggish spending on technology in the wake of the global financial crisis.
After selling $180 million in five-year convertible bonds in 2007 it sold close to $100 million in three-year convertible notes in 2009, a year when the stock market rose a stunning 81 percent. Conversion, which seemed a reasonable prospect when the bonds were sold, is out of the question.
After some changes, the conversion price for the 2007 tranche was set at 136.04 rupees and for the 2009 tranche at 80 rupees. Subex stock closed on Friday at 24.60 rupees.
"FCCBs are usually a product of bull markets. People expected prices would go further up, and they set very high conversion prices," said Deep Mukherjee, a Fitch Ratings analyst in Mumbai.
In its February study, Fitch said Subex and six other companies were likely to restructure their convertible bonds with "significant distressed debt exchange" features.
Subex faces a deadline of July 9 to pay its debt, although it has reduced the outstanding amount to $94 million after redeeming some of the debt. The company is trying to convince investors to accept new 5-year notes in exchange for the existing ones. Subex did not respond to requests for comment.
Wind turbine maker Suzlon Ltd (>> Suzlon Energy Limited), with net debt of $2 billion that is three times its market value, is negotiating with bondholders to seek up to 45 more days to repay $360 million in FCCBs maturing in June, the company said this month.
The conversion price of 97.26 rupees a share is way above its stock price, which last traded at 20.45 rupees. Part of Suzlon's strategy is to raise up to $300 million in loans to pay the bondholders next month.
'SHEDDING TEARS'
Bigger and healthier firms such as Tata Motors (>> Tata Motors Limited) and JSW Steel (>> JSW Steel Limited) either have a combination of enough cash and assets on their balance sheets or access to domestic funding from bankers to avoid major problems.
Tata Steel has $473 million in FCCBs falling due this year, and JSW Steel $274 million.
For many executives the turn of fortune for India in the past few years has been a hard lesson. Smaller and medium-sized Indian firms now face a much tougher lending landscape.
"When we issued it, free money was available and I think no one expected that one will have to repay that amount," said Hiranya Ashar, chief financial officer of mid-sized IT services provider Rolta India (>> Rolta India Limited).
"Everyone's expectation was growth is happening at 20 to 25 percent and if growth is happening then stock prices will also go up and eventually these FCCBs will get converted."
Rolta, which this month posted a drop in profit for the third quarter in a row, has raised $135 million from a clutch of Indian banks to redeem bonds maturing next month. It has to repay as the conversion price is five times the current market price.
"It was not easy to get the refinance done. All the lenders are very selectively giving refinance facilities ... our leverage levels are not very high as compared to maybe some other companies who are stretched," Ashar said.
Analysts say top quality Indian companies will still be able to raise funds from international investors. But smaller and medium sized companies that in previous years banked on a non-stop rising share prices, now face being shut out of markets, especially since many lenders are under pressure from regulators to boost capital ratios and lower their risks.
"Now, I don't want to touch 90 percent of Indian convertible bonds. It is very dangerous," said Berghmans, who holds bonds of Educomp Solutions (>> Educomp Solutions Limited) and Rolta India among others.
However, bond investors can't cry foul, analysts say. Many were swept up into buying into India's seemingly unlimited potential without conducting the necessary financial due diligence.
"The risk is hitting them at a bad time, but should anybody shed any tears for these investors?" Fitch's Mukherjee said.
(Editing by Neil Fullick)
By Sumeet Chatterjee and Rafael Nam
