Corporate India that took the foreign currency convertible bonds (FCCBs) route to raise funds, might opt to repay bondholders as the FCCBs near maturity, instead of restructuring these or raising domestic debt.
This will subsequently impact the cash flow, but in case they raise domestic debt, the margin of firms will get squeezed, say analysts.
As on March 15 this year, 90 companies listed in the BSE 500 had outstanding FCCBs aggregating to Rs 54,610 crore. Unless converted earlier, these will lead to an outflow of Rs 65,200 crore, said a study by Edelweiss Securities.
The report said the probability of FCCBs being converted into equity for 50 companies is extremely low, even after assuming 20 per cent compounded annual growth rate (CAGR) to the current market price.
“Our analysis reveals that most of these shortlisted companies will either have to opt for refinancing or a downward revision in conversion price. Assuming refinancing cost at 10 per cent per annum, on an aggregate basis, the reported profit before tax of the shortlisted companies will be lower by 26.5 per cent. For companies with a net debt/equity (D/E) ratio of around 1.5 or more, lowering of conversion price will lead to equity dilution to the extent of 19.2 per cent,” said the report, compiled by Manoj Bahety, Sandeep Gupta and Nitin Mangal.
Bharat Forge, which had raised $120 million through FCCBs in two tranches (due April 2010), opted to repay bondholders. Of these, about $17.75 million were converted into equity shares during the tenure of the FCCBs. The company redeemed FCCB aggregating $131.48 million (that includes principal of $102 million and redemption premium of $29 million).
When the market was bullish in 2006 and 2007, many firms opted to raise funds by issuing FCCBs. A total of $5.6 billion was raised in 2007-08 through FCCBs. For India Inc, FCCBs were considered to be cheaper than normal debt.
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Similarly, for investors FCCB offered guaranteed returns, with further gains from price appreciation by way of equity participation above the effective conversion price. But with stock prices falling in 2009, FCCBs became a nightmare for firms.
| PRESSURE ON LIQUIDITY | ||||
| Company | FCCB redemption amount* (Rs cr) | Avg CFO post interest (Rs cr) | Revised net D/E | Impact on PBT (%) |
| RCom | 7,172.4 | 6,912.24 | 0.9 | 11.6 |
| Suzlon Energy | 2,177.5 | -317.80 | 1.3 | 13.5 |
| Punj Lloyd | 282.3 | -592.00 | 1.1 | NM |
| GTL Infra | 1,446.9 | 80.15 | 1.7 | 204.4 |
| Firstsource | 1,336.2 | 145.00 | 1.0 | 263.6 |
| 3i Infotech | 716.9 | 254.20 | 1.9 | 24.9 |
| * the amount mentioned is the total FCCB amount that matures at different time periods CFO: Cash flow Source: Edelweiss | ||||
Take the instance of Reliance Communications. The second-largest telecommunications firm raised a total of $1,500 million through two FCCB issues. The first of $500 million matures by May 2011 and the second of $1,000 million is due in February 2012. While the company has bought back some FCCBs, it will still have to repay the bondholders. To be able to convert these FCCBs to equity, the effective conversion price required is Rs 624.9 which needs a CAGR growth of 204 per cent.
Restructuring of FCCBs seems unlikely in case of Reliance. With a debt of about Rs 19,800 crore, raising further debt to repay the $340 million (about Rs 1,530 crore) by May 2011, also seems unlikely.
Even in case of firms that have managed to reduce their conversion price on FCCBs, redemption is bound to happen. Tata Motors had in March 2010 given its bond holders opportunity to convert their bonds into the company’s ordinary share. This was for FCCBs worth JPY 11,760 million (due in March 2011) and $300 million (due in April 2011).
“The offer, which closed on March 29, 2010, met with great success — with bondholders representing 93 per cent of the JPY bonds and 76 per cent of US dollar series bonds respectively, opting to convert their bonds into ordinary shares. Following this conversion, the company will have to redeem bonds worth only about Rs 400 crore in the aggregate, when they are due next year and are not converted,” said an official reply from the company.
Hotel Leela Ventures’s FCCB worth Euro 60 million matures in September 2010. The company is planning to repay the bond holders leading to pressure on profit margins. “The Euro Bond of Euro 60 million was issued in September 2005, out of which over Euro 8.4 million was already converted and Euro 12.2 million was bought back at a huge discount to the accreted price. The current outstanding is Euro 39.20 million which is maturing in September, 2010. We are confident of paying the amount on maturity and refinance the same. The redemption will be done partly through funds generated by internal accruals,” said Vivek Nair, Vice Chairman & Managing Editor, The Leela Palaces, Hotels & Resorts.
For IT firm Firstsource that had raised $275 million to fund one of its largest acquisitions, redemption is not an immediate concern. “Our outstanding FCCB amount is $212 million, since we were among the few firms who successfully bought back FCCBs at a good discount. We consider this to be debt and we have more than two years to go for redemption. We are aware of the options that include restructuring of FCCBs, as well as raising debt if required. In terms of cash, we are comfortably placed. We have $50 million cash on books. Besides the company generates free cash in the range of
$8-10 million every quarter,” said a company spokesperson.