Distressed Jaiprakash Shows Default Wave Challenge: India Credit

(Bloomberg) — Cash-strapped Indian companies are trying overseas bondholders’ patience, souring sentiment just as Prime Minister Narendra Modi seeks more foreign investment.

Jaiprakash Power Ventures Ltd., whose parent built India’s only Formula One race track, asked noteholders this week not to call a default when its dollar bonds mature on Feb. 13 and promised to pay back the $200 million by March 2016. Wind- turbine maker Suzlon Energy Ltd., which built up the equivalent of $4.9 billion in liabilities as of Sept. 30, is seeking to sell assets to raise more cash by the end of March.

Regulatory holdups and tariff issues have hurt Jaiprakash Power’s business, making it harder to raise cash by selling assets. It risks joining the 21 Indian borrowers that have missed payment obligations on about $1.2 billion of foreign debt since the global financial crisis. Many utilities in India have debts so big and cash flow so small they can’t provide a steady flow of electricity, prompting the government to in 2012 orchestrate a $31 billion industry bailout.

“Small and mid-cap companies with any question mark over their reputation will have to forget this market for some time,” said Sudip Shah, the London-based chief executive of Orbit Investment Securities Services Plc. “Investors will ask for premiums to cover the heightened risk because several have been severely burnt.”

Modi has pledged to spur economic growth after his landslide election victory last May. Local companies need to repay $846 million of convertible notes in 2015 and $1.4 billion next year, data compiled by Bloomberg show.

Asset Sales

Jaiprakash Power offered to repay $75 million of its $200 million of notes in June and the balance by March 2016, a person familiar with the matter said on Feb. 2. The notes can be converted into shares at about 85.8 rupees ($1.39) apiece. The stock dropped 36 percent last year and is now at 11.55 rupees.

“We are in a conversation with the bond holders,” Udayan Sharma, a spokesman for Jaiprakash Power, said in an e-mailed response to questions yesterday, declining to comment on the repayment agreement. “We will inform the stock exchanges once we reach a conclusion.”

Jaiprakash Power sold the 5 percent convertible notes in January 2010 at 100 cents on the dollar. They rose 1 cent to 85 Thursday and traded as high as 93 last month, prices indicated by SC Lowy Financial HK Ltd. show.

The company has been trying to sell power assets to raise funds. A unit of billionaire Anil Ambani’s Reliance Power Ltd. scrapped a deal in September to buy three of hydropower plants while Abu Dhabi National Energy Co. in July withdrew from an agreement to buy two projects. It agreed in November to sell two hydropower plants to JSW Energy Ltd. for 97 billion rupees. Parent Jaiprakash Associates Ltd. separately proposed selling two cement plants to UltraTech Cement Ltd. for 54 billion rupees.

Suzlon Default

Suzlon defaulted on $209 million of convertible bonds in October 2012. Creditors approved a plan last July to issue $547 million of new bonds to replace the older ones, effectively pushing the maturity out to 2018.

“The Indian convertible bond market, despite all its potential, is effectively dysfunctional in terms of participation and protection,” said Tobias Bettkober, who runs a convertible bond fund in Zurich at Holinger Asset Management.

Jaiprakash Power has reported negative free cash flow every fiscal year since 2010. Slow progress cleaning up India’s power industry may mean reforms won’t bear fruit until another one or two years, it said in a Jan. 28 exchange filing.

Expansion Too Rapid

“Jaiprakash expanded into too many businesses within a short period of time,” said A.K. Sridhar, who oversees 65 billion rupees as chief investment officer at Mumbai-based IndiaFirst Life Insurance Co. “Power projects are rather capital intensive and have long gestation periods. Selling assets will ease the situation somewhat but won’t pull them out of the problem.”

Other industries showing signs of distress include airlines, telecommunications and construction, Sridhar said.

The Reserve Bank of India’s benchmark rate of 7.75 percent has encouraged many companies to seek funding overseas instead. International note sales rose 28 percent to $18.8 billion last year. Rupee-denominated offerings increased 14 percent. Ten-year government bonds yield 7.7 percent compared with 1.77 percent for similar U.S. Treasuries.

Overseas funding will still remain an option for better quality companies, especially those above $2 billion in market value, according to Raj Kothari, an emerging market fixed income trader in London at Sun Global Investments Ltd.

Jaiprakash Power, based in Noida near New Delhi, plans to issue a notice to bondholders on Feb. 27 and hold a meeting to get their consent on March 6, the person familiar said.

Some Asian issuers “don’t understand such games can be really damaging and make foreign investors more reluctant to subscribe to new issues,” said Giuseppe Mirante, a money manager at MFM Mirante Fund Management in Lausanne, Switzerland who holds the company’s notes. “There will be a pushback to get payment as soon as possible, more like within six months, not 12.”

To contact the reporters on this story: David Yong in Singapore at [e-mail]; Anoop Agrawal in Mumbai at [e-mail] To contact the editors responsible for this story: Sandy Hendry at [e-mail]; Katrina Nicholas at [e-mail] Katrina Nicholas