Rupee in Free Fall

USD/Rupee hit another high today, crossing Rs 57 to a Dollar – an all time low for Rupee. Causes aside, what are the ramifications? This CNBC article sheds some light:

Indian companies are coming under significant financial pressure as a result of weakness in the rupee, which is hampering their ability to service foreign currency debt, Standard & Poor’s (S&P) warned on Thursday.

According to the ratings agency, half of the 48 companies in India with foreign currency convertible bonds (FCCBs) maturing this year, could default on their payments. FCCBs worth $5 billion are due for redemption between now and December.

These bonds, which give investors the option to convert into equity shares at a pre-determined price – were viewed as a convenient and cheap source of funding for Indian corporates in recent years.

They allowed firms to borrow with coupon rates as low as zero percent. “For some Indian companies, issuing foreign currency convertible bonds during the stock market boom seemed like a bright idea. But it’s now running into a nightmare,” Vishal Kulkarni, primary credit analyst at S&P, said in a report on Thursday.

With the stock market down 9 percent from its peak in February, and many shares seeing much larger drops, investors will be reluctant to convert their bonds into stock, forcing companies to come up with cash to return to bondholders.

“Investors don’t want to convert the FCCBs into stock that’s worth 20-90 percent less than the conversion price,” Kulkarni said.

But paying cash back to bondholders could prove challenging for the companies since the rupee [INR=  57.05    0.80  (+1.42%)   ] has tumbled 25.8 percent against the greenback over the past year.

“Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about 42 to the U.S. dollar. The rupee has now plummeted more than 30 percent,” he added.  The rupee touched a fresh record low of 56.52 against the dollar during Thursday’s trading session. [more..]