Companies with outstanding foreign currency convertible bonds face redemption worth $13.5 billion, but they have enough cash to meet conversion or buyback needs.
Indian listed companies that have mobilised funds through foreign currency convertible bonds (FCCBs) for expansions and overseas acquisitions are sitting pretty on huge cash piles. A total of 158 companies, which have outstanding FCCBs, had mobilised $16.5 billion between 2004 and 2008. These companies are now facing redemption of FCCBs worth $13.5 billion and have liquid cash of Rs 83,806 crore ($16.15 billion) with them, which is enough to meet the conversion or buyback needs.
These companies have cash and bank balance of Rs 32,500 crore for 2007-08. That apart, they have given loans worth Rs 17,696 crore to their subsidiaries and have invested around Rs 9,074 crore in mutual funds. They have also earned a profit of Rs 24,523 crore during the nine months ended December 2008. (Click here for detailed table ISSUERS UNDER BOND BURDEN)
As on March 31, 2008, these 158 companies had $13.5 billion worth of FCCBs valued at Rs 53,197 crore. These FCCBs are to be either converted into equity shares between 2010 and 2012, or redeemed with bond holders at yield-to-maturity (YTM) value. Looking at the current market prices of companies that have issued FCCBs, it is a foregone conclusion that these FCCBs may not get converted into equity shares in the near future.
If the stock of a company does not perform during the life of its bonds, then at maturity the issuer redeems the bonds at a premium, which is basically the accretive yield on the bond. The accretive yield on maturity is averaged at around 125-148 per cent as per the data submitted by the 158 companies at the time of issuance of FCCBs.
This means the companies have to pay an additional Rs 21,000 crore if FCCBs are not converted into equity shares. The rupee depreciation, almost 18 per cent so far this year, can add another Rs 10,000 crore, thereby taking the total redemption value to over Rs 84,000 crore.
| OUTSTANDING FCCBS: ALL AT A DISCOUNT | ||||||
| In $ million More From This Section | Price in Rs | Discount | Maturity | |||
| Issue size | OS | Conversion | Market | |||
| Reliance Comm | 1000 | 990 | 661.23 | 137.80 | -79.16 | Feb, 2012 |
| Tata Steel | 500 | 500 | 758.10 | 156.85 | -79.31 | Sep, 2012 |
| Tata Motors | 490 | 490 | 960.96 | 138.50 | -85.59 | Jul, 2012 |
| Ranbaxy Labs | 440 | 440 | 716.32 | 141.30 | -80.27 | Mar, 2011 |
| Jaiprakash Asso | 400 | 396 | 247.76 | 69.55 | -71.93 | Sep, 2012 |
| Tata Steel | 375 | 375 | 758.10 | 156.85 | -79.31 | Sep, 2012 |
| JSW Steel | 325 | 325 | 953.40 | 174.20 | -81.73 | Jun, 2012 |
| RNRL | 300 | 300 | 37.00 | 36.65 | -0.95 | May, 2011 |
| Suzlon Energy | 300 | 300 | 359.68 | 35.00 | -90.27 | May, 2012 |
| Tata Motors | 300 | 300 | 780.40 | 138.50 | -82.25 | Apr, 2011 |
| OS=Outstanding | ||||||
For the issuer, FCCBs (especially zero-coupon ones) are not shown in the profit and loss (P&L) account until maturity, which makes this an attractive method of raising finances.
Although the Reserve Bank of India (RBI) allowed FCCB prepayment in December 2008, the response so far has been lukewarm.
“At present, bonds are trading at a reasonable discount. So, it makes sense for companies to buy back bonds through overseas borrowings. Tata group companies have an aggregate $2-billion outstanding FCCBs, half of which can be bought back to reduce the debt liability. The remaining can be restructured if the market condition continues to remain gloomy for another one year,” an executive of the Tata group said on condition of anonymity.
GMR Group Chief Financial Officer Subba Rao says non-availability of foreign currency is the real issue when going for premature buyback of FCCBs. Since the scope of refinance is limited in European and US markets, long-term borrowings have dried up. Even for working capital and capacity expansion, companies with high reputation are getting short-term debts overseas.
Grasim Industries’ Chief Financial Officer D D Rathi says companies blessed with adequate cash in their books could buy back their FCCBs at a discount. This will help them reduce the debt in their books to raise further capital for other growth plans.
Analysts at Global Absolute say if any company has unused proceeds from FCCBs, it should buy the bonds back. The fact is that overseas finances are drying up. Even if funds are available, the cost of borrowing would be at least 900-basis point above Libor.
Besides, RBI has not allowed Indian companies to raise funds from the domestic market to buy back FCCBs. However, some companies such as Aurobindo Pharma are raising overseas as well as private equity funds.
In the last three years, most of the FCCBs were issued by the telecom sector (14 per cent), followed by pharma (13 per cent), IT (12 per cent), metal (9 per cent), construction (7 per cent) and auto (6 per cent). More importantly, the maximum discount to conversion prices was noticed in sectors like auto, capital goods, telecom, construction and pharmaceuticals.
Among the major automobile players, Tata Motors has a cumulative outstanding FCCBs worth Rs 3,661 crore. It has four outstanding FCCBs and one out of them is convertible at Rs 1,001 (due in March 2011). In view of the current market price of Rs 138.50, the FCCB is at an 86 per cent discount compared to the conversion price.
Another auto component player with a sizeable FCCB outstanding is Amtek Auto. It has two outstanding FCCBs worth Rs 1,250 crore. While one FCCB is due for maturity in June 2010, the other is due in June 2011. The conversion price of the second is at 88 per cent discount to the current market price.
Bharat Forge has also three outstanding FCCBs, which cumulatively amount to Rs 730 crore. Compared to the current market price of Rs 81.40, the highest conversion price of one of the FCCBs is at Rs 690 per share (87 per cent discount to the conversion rate). The earliest due date of the FCCB is April 2010 and the outstanding FCCB is for $60 million. Bharat Forge is likely to opt for pre-payment.
In the capital goods sector, Easun Reyrolle, which had raised $35 million via FCCB, is more vulnerable as its outstanding is Rs 141 crore. The current market price of Rs 37 is at 91 per cent discount to the conversion price of Rs 400 (due in December 2012). In fact, Suzlon Energy is also likely to face pressure due to outstanding FCCBs. The total outstanding amount of FCCBs for Suzlon is Rs 2,005 crore, while it has a cash balance of only Rs 1,215 crore.