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Will Sterling Biotech Default on FCCBs Today?

Sterling Biotech is in serious trouble. With plunging revenues and a very high debt cost, they’re now also going to have to pay back $183M worth Foreign Currency Convertible Bonds (FCCBs).

(Read more about The FCCB problem)

STERLINBIO (the NSE Code) borrowed $250 million in 2007, with a conversion price of Rs. 163.13 till May 2012, at a fixed dollar rate of Rs. 42 to a dollar. Some of this was converted – the graph below shows you the stock stayed above the conversion price till mid 2008 – and some was bought back from the open market (FCCBs trade in markets abroad), after RBI allowed companies to do so at a discount.

image

The stock is at a miserable Rs. 8 today, which basically throws any chances of conversion out the door. Even if it was Rs. 163, it wouldn’t be converted, since the dollar rate is fixed at 42 for the conversion – the current dollar rate is Rs. 54 or so; the equivalent break-even rate would be Rs. 205.

In the face of no-conversion, the money has to be returned, with some interest. Nearly $184 million needs to be repaid today (16 May 2012) – a total of 993.6 crore rupees (9.936 billion).

Sterling Biotech hasn’t got the money, it seems. Their recent results show a loss of Rs. 92 cr. in just the JFM quarter, with even the December quarter showing losses. Their main business of Gelatin has been seriously impacted by higher effluent discharge anti-pollution norms, and their CoQ10 products have been hammered by cheaper Chinese competition.

The company has huge debt – the debt:equity ratio is now 8:1 compared to about 1:1 in 2007. They have another $670 million worth of loans from local lenders and External Commercial Borrowing (ECB). They’ve even restructured with local lenders to give them a two year moratorium on both interest and principal, and ECBs are anyway back-loaded so they’re probably have a two year headroom.

But the FCCB comes due today and a default is imminent. I don’t have any news of an FCCB restructuring and if there is no news today the company will then have defaulted on $184 million. The last big default was Wockhardt, which was half this size (Less than $100m). And Wockhardt might even repay.

I bring your attention to my earlier chart on FCCB redemptions in 2012:
image

Now the $184M is a significant part of that massively stressed portfolio of FCCBs in May, and look further into June and July as the total redemption value shoots even higher. July has a $421 million potential default on FCCBs.

Some of these companies have borrowed from local lenders too. When they default on their FCCBs, the FCCB holders will file a winding-up petition (like Zenith and Wockhardt) and that might result in the local lenders having to restructure as well. Additionally the court delays in completing a pay-up-or-shut-down operation will scare lenders abroad from lending more to Indian companies – a situation that means companies can’t borrow abroad (through ECB or such) to repay the FCCBs.

Since India finances its trade deficit through investment flows, a slowdown in investment is the death-knell for the rupee. While we may have written off Sterling Biotech as a gone-case, what its default might trigger is an avalanche.

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