Coming next from China: Cheaper loans!

After cheap toys, consumer goods and other manufactured products, cheaper loans could be the next major Chinese import into India, and the credit may go to a potential FCCB crisis looming large over Indian corporates.

In the next one and half years, close to 100 Indian companies need to repay an estimated Rs 33,000 crore (over $7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) and they are scurrying around for cheaper resources to meet these repayment obligations.

The Chinese banks may emerge as the big winners as a host of Indian companies have begun exploring possibility of getting cheaper loans from China to meet their other costlier foreign borrowing obligations and ward off a red mark on their creditworthiness, a senior banker said.

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.

The companies which issued FCCBs in 2007-2008 include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp, Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.

However, share prices have fallen sharply since 2008 for many of the companies that had issued FCCBs to raise loans and their stocks are currently trading way below the conversion price fixed at that time.

This has put the borrowers and also the lenders in a spot, as the companies cannot risk defaulting on the FCCB redemption payment and the bondholders would not convert the bonds into shares at a price way above the current levels.

There is another option that allows the companies to reset the conversion price, but this generally leads to a decline in the company's share price as it is seen as an inability on the part of the borrower to meet its payment obligations.

Still, a lot of companies have recently reset their FCCB conversion prices at the cost of their share prices and these include Suzlon, Spicejet and Gitanjali Gems.

A vast majority of the companies are, however, looking for other resources to redeem their FCCBs.

With loans having become expensive in India and most of the Western markets already having been tapped, the companies are approaching investment banks to explore the possibility of tying up funds from Chinese banks, another banker said.

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, banking sources said. However, they declined to name the companies citing client confidentiality clauses.

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 $3 billion worth loans from China.

Reliance Power is said to have saved about Rs 6,500 crore (Rs 65 billion) in interest costs when it tied up $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.

Research firm Crisil recently said that FCCBs worth Rs 22,000-24,000 crore (Rs 220-240 billion), maturing by March 2013, may not get converted into equity, as the current share prices of issuing companies are significantly below their conversion prices.

Crisil said that refinancing of these FCCBs with fresh debt would increase the interest burden of companies as most of the FCCBs carry very low or zero coupon rate.

On the other hand, companies lowering their conversion price could witness a sharp dilution in their equity, which will lead to further decline in their share prices.

Crisil also warned that companies with FCCBs worth Rs 1,500-2,000 crore (Rs 15-20 billion) could find it tough to meet the repayment obligations because of their weak financial profile and low promoter holdings.

The central bank RBI also recently warned of an impending FCCB crisis and due to a large-scale FCCB maturity.

"Estimates show that a very large proportion of these FCCBs may not get converted into equity thus requiring their refinancing at the much higher interest rates prevalent today," RBI said.

As per RBI data, FCCBs worth about $3.5 billion are maturing in the current fiscal 2011-12, while FCCBs worth about $4 billion would mature in 2012-13.

Things could improve thereafter with FCCB maturing worth about $627 million in 2013-14, $2.5 billion in 2014-15, $467 million in 2015-16 and only $25 million in 2016-17.