After a year’s lull, foreign currency convertible bonds (FCCBs) are regaining currency. In the past four days, four companies have announced plans to raise $702 million (around Rs 3,370 crore) through FCCBs.
If Amtek Auto’s $65 million FCCB issue on September 11 is taken into account, the amount for September would be much higher. Before Amtek Auto, the last FCCB issue took place in August 2008 when Temptation Foods raised $200 million. But the global credit crisis and the liquidity crunch spoilt the party.
| CURRENT ACCOUNT | ||
| Name | Date* | Amt ($ mn) |
| Amtek Auto | 11-Sep | 65 |
| Guj NRE Coke | 22-Sep | 60 |
| Sujana Towers | 22-Sep | 12 |
| Sesa Goa | 24-Sep | 500 |
| Welspun Gujarat | 25-Sep | 130 |
| *Date of announcements | ||
FCCB is a hybrid instrument that enables a buyer to convert bonds into equity before maturity at a pre-determined price. With share prices crashing, Indian companies were forced to buy back the bonds even if some of them had to raise fresh funds or dip into reserves. In all, 17 Indian companies bought back bonds worth $472 million using the special window opened by the Reserve Bank of India in December last year.
According to CLSA estimates, around 185 companies had issued FCCBs worth $20 billion (over Rs 95,000 crore) between 2004-05 and 2007-08. Of this, around $15 billion (around 72,000 crore) was outstanding, while the balance has been converted into equity. Most of the FCCBs are due for maturity over the next three years.
There were fears that the fall in equity markets would make the FCCB-issuing companies repay the debt. But with abundant liquidity in the global financial system and share prices rising in the domestic market, Indian issuers are back in the market.
“Investors expect the Indian stock markets to move up from current levels. So, they are looking at the incentive to convert the bonds into equity as prices rise,” said an executive at Welspun Gujarat. The company placed its $130 million issue with European and Asian investors.
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Over the last three months, Indian companies have raised around $5 billion (Rs 24,000 crore) through external commercial borrowings, but most of these have been credit lines from parents, export credit agencies or Indian bank branches overseas. By offering conversion into equity as a sweetener, Indian companies are now trying to get overseas investors to shed their reluctance following last year's credit crisis.
Although investment bankers expect FCCB activity to pick up in the coming months, they warned companies to be careful. “Issuers of such bonds have to learn to manage liabilities; they need to provide for such bonds for risk management purpose and consider the outstanding bonds for calculating debt-equity ratio,” said Ravi Kapoor, managing director, capital markets for Citigroup Global Markets India.
The FCCB markets have, however, changed in terms of buyers and the coupon and premium available. Hedge funds, which were the largest subscribers earlier, have limited their participation. The largest participants are outright convert buyers who predominantly trade in FCCBs.
“Credit spreads have fallen dramatically in the last three to four months which is helping companies place FCCBs at much lower coupons,” said Vedika Bhandarkar, managing director, at J P Morgan India, the investment bank that was the sole book runner for the transaction of Welspun Gujarat.
Some FCCBs by overseas companies were placed at a coupon of 7 to 8 per cent early this year. Now the companies are able to place FCCBs at a coupon of 4 to 4.5 per cent. “The premium has also been rationalised and the days of 50 per cent premium are over,” she added. The bank was able to place the issue of Welspun Gujarat at premium of 20 per cent.