A sharp fall in the value of the rupee since August is expected to increase the repayment costs of the foreign currency convertible bonds (FCCBs) by Rs 500 crore to Rs 2,000 crore for 39 companies that are facing redemption in the next 12 months.
The pressure will be more in the case 15 firms as redemption costs will be higher than their cash flow in the next one year, according to a study by the Business Standard Research Bureau.
For example, KSL Industries need a cash of Rs 500 crore before May 2012 to redeem $74.55 million outstanding FCCBs at 140 per cent premium. With negligible cash balance, the company may go for borrowing.
The calculation is based on assumption that the rupee will in the next twelve months move a between Rs 46-50 to Rs 48.50 per US dollar.
Anjan Ghosh, group head (corporate sector rating) Icra, says rupee depreciation will add to the strain on debt servicing by Indian companies, whose FCCBs are coming up for redemption in next twelve months. It could add 10-12 per cent to extra burden.
BSRB study shows that impact will be on 39 companies who hae FCCBs worth $3.37 billion outstanding. These firms had mobilised $4.42 billion in 2006-2007 with an option to the investor to convert it into equity shares.
The conversion prices of FCCBs were kept very high to prevailing stock prices. Also, a significant drop in stock prices due to global economy crisis impacted full conversion. No wonder, only $1.05 billion worth FCCBs so far converted into equity shares; the outstanding portion is ripe for yield to maturity (YTM) redemption.
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The YTM redemption premium for 39 firms studied here averaged at 136.2 per cent for the full five years term, and that has escalated the cost by 36.2 per cent. So, the burden due to rupee depreciation and YTM premium is set to increase redemption cost.
Apart from rupee depreciation, the costs of outstanding FCCBs worth $3.37 billion has already gone up by $1.22 billion (Rs 5,471 crore) on account of the large premium embedded with redemption, according to the analysis.
Crisil, another rating agency said in its analysis on depreciation of rupee that corporate debt repayment might continue to exert downward pressure on the rupee through the rest of the fiscal, as Indian companies pay back their foreign debt.
| REDEMPTION PRESSURE | ||||
| Maturity | FCCB outstanding in | YTM % | ||
| $ million | in Rs crore | |||
| COMPANIES WITH POOR CASH FLOW | ||||
| 3i Info | Jun-12 | 86.57 | 428.23 | 135.25 |
| KSL Ind | May-12 | 74.56 | 304.74 | 140.00 |
| Orchid Chem | Feb-12 | 117.42 | 523.58 | 142.77 |
| Rolta India | Jun-12 | 96.69 | 450.57 | 139.39 |
| Subex | Mar-12 | 93.80 | 418.30 | 140.00 |
| COMPANIES WITH GOOD CAHFLOW | ||||
| Bharat Forge | Apr-12 | 79.90 | 356.43 | 142.58 |
| Gitanjali Gems | Nov-11 | 70.91 | 316.33 | 135.85 |
| JSW Steel | Jun-12 | 274.40 | 1225.20 | 142.80 |
| Reliance Communication | Feb-12 | 925.30 | 5450.62 | 130.00 |
| Tata Motors | Jul-12 | 473.00 | 2109.11 | 131.82 |
| Source: Companies | ||||
Considering the prevailing weakness in the equity markets, it would be difficult to swap the FCCB repayments with equity or roll them over.
Over the past few years, Indian companies have aggressively used FCCBs to raise seemingly cheap funds to finance their growth plans. FCCBs, with their low coupon rates and high conversion prices to prevailing stock prices, had been extremely attractive particularly bet in bull market.
The steep correction in stock prices has brought many negatives of FCCBs to the fore. For companies, where FCCBs are likely to be redeemed, profits are overstated — to the extent that the true cost of the debt or YTM is not reflected in the profit & loss account.
Currently, most companies do not charge redemption premium to the P&L account on the assumption that bonds will finally be converted into equity shares. Of the 39 firms with an aggregate FCCBs debt of Rs 16,368 crore, the redemption provision has been minuscule Rs 2,500 crore.
Hence, in the event of non-conversion, a significant cost is kept off the P&L account. Also very few companies have hedged foreign currency exposure on FCCBs. With depreciation of rupee against dollar and other global currencies, the redemption amount has gone up for issuing currency.