FCCB crisis brewing, says Reserve Bank

Two-thirds of firms may not be able to convert these bonds into equity.

The Reserve Bank of India (RBI) has said it expects several companies which have raised money through foreign currency convertible bonds (FCCBs) to face severe funding problems in the next two years due to lacklustre equity markets.

“More than a few firms potentially face severe funding problems in the next two years, which may not remain confined to their industries,” the central bank said on Tuesday in its report on financial stability.

FCCBs were popular instruments during the bull run in the equity markets between 2005 and 2008. Rising stock prices allowed companies, including many midcaps, to raise hybrid capital using convertible instruments. In those three years, 201 overseas convertible issues raised close to Rs 72,000 crore, according to Prime Data Base. The conversion price on such bonds was 25-150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons. FCCB proceeds were meant for overseas acquisition (19 per cent) and import of capital goods (16 per cent) in line with returns filed by the companies.

RBI expected about 45 per cent or Rs 32,000 crore of these bonds to be up for redemption during financial year 2012-13. Two-thirds of this may not get converted into equity shares, as the current stock prices of issuing companies are significantly below their conversion prices, RBI said.

“The Nifty is now only about 10 per cent below its highs in January 2008. But many of these companies, accounting for more than half of the outstanding FCCBs, are trading at a discount of more than 50 per cent to their January 2008 prices,” the central bank said quoting a Crisil estimate.

In January, group of three FCCB holders, led by QVT, had filed a winding-up petition against Wockhardt. Wockhardt had to pay an outstanding of $110 million worth of FCCBs by October last year. It managed to settle with several creditors, but was still left with disputed FCCBs worth about $75 million, sending investors to court.

Media reports last week said media company Fame has defaulted on its FCCBs.

Tarun Kataria, India CEO, Religare Capital Markets Limited said, “For many issuers already levered, leveraging further may not be easy. They have to either restructure or change the terms of conversion. Some of them are buying back quietly. Lot of people are in the process of negotiating in one of these two, three options depending on their position.”

An investor who has a significant FCCB portfolio said most Indian promoters, especially of the mid cap firms do not have the intention to default. “If 100 FCCBs come up for redemption in the next one year, 70 will pay, 20 will restructure and may be a 10 will default.”

According to him, investors typically allow companies some breathing space, if their intentions are not doubtful. “Investors are ready to increase the duration , take additional collateral or increase coupons on a case-by case basis,”he added.

“Our debt equity ratio is 7:1, so we are comfortable in meeting all our FCCB repayment obligation. In July this year $ 33 million of outstanding bonds are due to mature. We are still working out the means of repayment, but I think we shall be raising short term debt,” Radico’s Managing Director Abhishek Khaitan told Business Standard.

FCCB buyback window extended
RBI, along with the finance ministry, is believed to have allowed companies to buy back foreign currency convertible bonds till March next year, according to a a report by CNBC-TV18. The deadline was set to end this month. The decision is expected to help companies whose FCCBs are trading at deep discount.