JSW Steel stares at warrant conversion, bond maturity

Reeling from losses due to the acquisition of Ispat Industries, JSW Steel is now staring at two big events. The first is a December 15 deadline for the promoters to infuse Rs 1,588 crore into the company and, second, maturing of foreign currency convertible bonds (FCCBs) six months down the line.

These couldn’t have come at a worse time. The company issued preferential warrants to Sapphire Technologies, a promoter group company, in June 2010 to raise capital to meet its capex plans and service debt. It had issued 17.5 million shares at Rs 1,210 apiece to raise Rs 2,117 crore. The issue price was at a 15 per cent premium to the then share price of JSW Steel. But the tide has turned since then, and JSW’s stock price is languishing at over 50 per cent discount to the warrant issue price.

According to the Securities and Exchange Board of India’s rules, 25 per cent of the warrant money has to be paid at the time of the allotment and the rest at the time of conversion. The deadline to convert the warrants is just a fortnight away and the promoters are yet to convert those.

JSW Steel maintains the promoter company will meet the deadline. Sapphire paid Rs 529 crore during the allotment and will stand to lose the entire sum if it forfeits. The money will go to JSW Steel’s reserve account. However, if the promoter group converts the warrants, JSW Steel will get the much needed Rs 1,588 crore.

An investment banker said, “We have seen promoters do not convert warrants into shares, if they are trading at a significant discount to the issue price.”

Tata Power, Hindalco Industries and Indiabulls Real Estate had earlier decided not to convert warrants, as the share price was ruling at a heavy discount to the warrant price.

The company’s net total debt gearing stood at 0.99 and the weighted average interest cost of debt was 6.57 per cent at the end of September. For the second quarter, the company reported a net profit of Rs 127 crore on a stand-alone basis. But it posted a loss of Rs 669 crore on a consolidated basis due to forex translation loss of Rs 514 crore and Ispat Industries.

As on date, JSW Steel has Rs 1,700 crore in cash. The other area of concern is FCCBs of $325 million issued in 2007-08 is maturing in six months. Last year, the Reserve Bank of India allowed companies to buy back FCCBs if they were trading at a discount, and JSW did buy back a few. However, still bonds worth $274 million are pending.

The company had issued 3,250 FCCBs at $100,000 each. A total of 2,744 bonds are outstanding. According to the agreement, “Each bond is convertible into equity shares of the face value of Rs 10 each at a conversion price of Rs 953.40 per share, at any time on or after August 7, 2007, until the close of business on June 21, 2012, unless previously redeemed, converted or purchased and cancelled.”

Bonds, not redeemed, converted or purchased and cancelled are redeemable on June 28, 2012, at an amount equal to the principal amount of the bonds multiplied by 142.801 per cent.”

Since the share price is around Rs 600, investors are unlikely to convert the bonds into shares. In that case, JSW Steel will have to shell out money equal to the principal outstanding multiplied by 142.801 per cent, which comes to Rs 2,000 crore at the current exchange rate, or Rs 600 crore more than it was supposed to shell out.

Seshagiri Rao, joint managing director and group CFO said they have enough reserves and cash to buy back the FCCBs. However, with losses to the tune of Rs 600 crore already, the company will have to raise money. And, in a high interest rate regime, raising more debt to pay the old will stretch its balance sheet even further.