Rolta 66% Bond Crash Raises Red Flags on India Company Accounts
India’s latest bond default vindicated a U.S. short seller’s warnings a year ago, surprised debt ratings firms and cast doubts on companies facing a $41 billion debt- maturity wall in the next five years.
The market value of software maker Rolta India Ltd.’s two dollar bonds declined $183 million this year, delivering losses of as much as 66 percent. Their price slumped below 20 cents on the dollar in May after the provider of information technology services to the government, utilities and the power industry missed a coupon payment. Indian junk bonds are 2016’s second- worst performers in Asia in 2016 with almost zero return, while regional high-yield debt gained 7 percent, according to a Bank of America Merrill Lynch index.
“Corporate balance sheets are under stress for most companies in the private sector as they are overleveraged,” said Murthy Nagarajan, head of fixed income in Mumbai at Quantum Asset Management Co. “The Rolta event will play spoilsport for Indian companies trying to borrow from the offshore market.”
Indian borrowers, which have defaulted on more than $3.3 billion of foreign-currency debt since 2003, face $41.1 billion in maturities through the end of 2020, data compiled by Bloomberg show. Rolta rejected concerns over its accounting outlined by Glaucus Research Group California LLC in April last year and rating companies say they were kept in the dark over its finances.
Rolta missed a $6.8 million coupon payment due May 16 on its 10.75 percent notes that mature in 2018 and has a 30-day grace period. Its shares have dropped 35 percent this year in Mumbai. Ramakrishna Prabhu, its chief financial officer, didn’t reply to two e-mails seeking comments on its financial condition and couldn’t be reached by phone over the past two days. Rolta is confident of paying up during the grace period, chairman Kamal Singh told Mint newspaper on June 1.
“We knew there was some receivables issue," said Nitin Soni, the primary analyst in Singapore at Fitch Ratings, which downgraded Rolta to ‘restricted default’ on June 2 from CC citing weak liquidity. "But we didn’t know the situation was so bad that they might skip the payment.”
S&P Global Ratings bemoaned a lack of information when it downgraded Rolta five steps to CCC- on May 30. The next day, the rating was cut to ‘selective default’ because the company was seeking an extension to a credit facility overdue beyond 30 days.
Maturity Wall
Glaucus shorted Rolta bonds in April last year, saying the securities were worth 16 cents, questioning its capital expenditures and profit margins. It didn’t reply to an e-mail through its website seeking comment. Rolta’s 2018 notes traded at 18.8 cents on June 3, having lost 33 cents in May.
“Examples of adverse market reaction to weak governance or limited disclosure are many in the emerging market corporate space,” said George Ordonez, an Atlanta-based money manager at Invesco Ltd., who isn’t invested in Rolta. “If not corrected, lapses in governance and disclosure will lead international investors to abandon participation in a credit and will limit ongoing access to foreign capital.”
Indian companies face $5.2 billion of offshore debt maturities this year, ramping up to $6.1 billion in 2017, $8.9 billion in 2018 and $10.8 billion in 2019, according to Bloomberg data. Only four non-bank companies have raised a combined $971 million from overseas debt sales this year, down 67 percent from the year-earlier period.
Among other signs of stress at Indian borrowers, Jaiprakash Associates Ltd. missed a coupon payment in March, builder Punj Lloyd Ltd.’s units in Singapore sought court protection from creditors in February and Amtek Auto Ltd. lacked cash to redeem rupee bonds in September.
‘Severe Damage’
“We have had issues with corporate governance in the foreign-currency convertible bonds and the high-yield universe,” said Jayavardhan Diwan, a money manager in Mumbai at hedge fund OIM Capital LLC.
The yield premium over Treasuries for Indian speculative- grade notes widened to 830 basis points on June 1, a seven-week high, the Merrill Lynch index shows.
“The stigma will remain even if the company pays back the coupon during the grace period," said Trung Nguyen, a Singapore- based analyst at Lucror. "Severe damage has been done.”
Bloomberg News
June 3, 2016, 07:56:29 GMT
Reporting by David Yong, with assistance from Denise Wee; Editing by Andrew Monahan and Sandy Hendry