Small and medium enterprises (SMEs) have been finding it difficult to mobilise funds through foreign currency convertible bonds (FCCBs) from overseas investors.
In the first seven months, nine companies mobilised $695 million, while 10 other proposals to raise FCCBs worth $1.13 billion are pending. Investors’ sentiments towards new issues remain conservative, despite higher coupons and low conversion premiums offered by issuers, said Prashant Sawant, analyst at KNG Securities LLP.
In the first half of the current calendar year, Jaiprakash Power Ventures raised $300 million in February, offering conversion at 16.5 per cent premium and yield to maturity (YTM) rate of 7 per cent. Core Projects & Technologies allotted $75 million worth FCCBs for conversion premium of 10 per cent with YTM coupon of 7 per cent on redemption. Fortis Healthcare infused $100 million with YTM of 5.54 at a negligible premium. Shiv-Vani Oil & Gas Exploration Services raised $75 million with an offer to convert into shares at 15 per cent premium over market price on the issue date. Prakash Industries priced 5 per cent premium to the $60 million FCCBs.
The FCCBs issuers also could not take advantage of the reset in conversion price close to the current market price to reduce their overseas debt. However, very few companies (like Suzlon Energy) have managed to reset the conversion price. Though many others such as Alok Industries and Moser Baer got shareholders’ approval for the conversion resets; FCCB holders have not approved such resets decision as the resultant potential of new parity remains far lower than redemption value, said Prashant Sawant. Aksh Optifibre allotted $7.54 FCCBs due 2013, pursuant to an exchange offer to the existing bondholders.
The Reserve Bank of India (RBI) revived the FCCB buyback window for the companies, providing an ‘opportunity’ to reduce their overseas debt. This facility was closed on June 30. The response was very lacklustre as only $25-30 million worth of FCCB was bought back by companies such as Tantia Construction, Zenith Computer, ANG Auto and Suryajyoti Spinning, among others. A few companies are hopeful about this facility being reintroduced later this year. However, RBI has not issued any such notifications so far.
The India firms raised over $15 billion between 2005 and 2007, offering yield to maturity coupon rate of 3.5-5 and taking conversion premium of over 30 per cent. At present, FCCBs worth $11.5 billion raised by 114 companies are outstanding. A substantial number of issues (48) are concentrated in sectors such as IT & related, healthcare, metal and mining.
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Issues worth $321 million are expected for final redemption during the second half of 2010. As on today, a substantial amount of FCCB ($5.1 billion) is due for redemption during 2012. Of the 114 outstanding issues, a majority are still far from conversion price i.e. the parity is below par.
Currently, on an average, issues related to metals & mining are above par. Issues related to media, telecom and IT are deeply out of money. However, on the backdrop of unimpressive earnings, outcome from these sectors will impact the share price and effective parity is likely to be negative.