Though most are likely to pay in time, some may not have factored those in .
There is concern on companies with foreign currency convertible bonds (FCCBs) maturing in this quarter, with the falling rupee. There are 12 firms with FCCBs worth a combined $1.37 billion maturing in this quarter, translating into a redemption outflow of Rs 9,415 crore, including the yield-to-maturity (YTM) premium and the rupee impact. While the average redemption premium has been 33.6 per cent, the rupee’s depreciation of close to 20 per cent this financial year would raise outflow by Rs 1,300 crore.
"For companies with FCCBs due for redemption in the near future, the probability of mark to market losses (writing down assets to reflect current values) being realised is high," said Manoj Bahety of Edelweiss Research. If the companies chose to refinance redemption, then profits would take a hit, he said. "Companies whose FCCBs are maturing in the near future will either have to opt for refinancing or a downward revision in conversion price. Assuming refinancing cost at 12 per cent yearly, the reported profit before tax will be lower by 11.2 per cent,” he added.
| REDEMPTION WORRIES | ||||
| Maturity CY2012 | $ million | |||
In the past couple of months, Financial Technologies, Gati and ISMT put through redemptions without any trouble. Gati raised $22.18 million through FCCBs in December to pay dues of $20 mn and ISMT paid $10 mn with a redemption premium on December 1. Financial Technologies paid its obligations of $133.1 mn on December 21.
Orchid Chemicals faces redemption of $117.4 mn in February and has said it had managed to raise $100 mn through external commercial borrwing to pay the coming FCCB obligation. Spokespersons of Reliance Communications (Rcom) told Business Standard the company would ensure timely redemption of FCCBs due in March 2012. Subash Menon, chairman, Subex, said it was looking to raise funds worth $135 mn to meet an FCCB commitment worth $131 mn. Shareholders had approved the fund raising plan of qualified institutional placements, FCCBs and American or global depository receipts to fulfill the commitment. The company expects to complete fund mobilisation by the end of the next month.
The average yield for a basket of prominent FCCBs has been marginally lower than that of the YTM premium on redemption. This shows the confidence of FCCB holders on timely redemption. For example, Bloomberg data show a bid price of $138 for a $100 face value bond of Era Infra, which is to be redeemed on January 25 at a YTM of 148.95 per cent. The FCCB of RCom is being traded at a 21 per cent premium as against a YTM of 127.7 per cent.
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However, in the case of Prithvi Info, Karuturi Global, Subex, ICSA, KGL Systel and Pokarna, the market is more apprehensive on redemption, going by the convertible bond prices as their implied credit risk premium. There has been no bidding for the convertible bonds of KLG Systel, which faces redemption in March 2012. The company is facing strong financial reversal and proposed corporate debt restructuring, with a net loss of Rs 96 crore in the past 18 months.
YTM premiums depend upon the need to raise funds before redemption, apprehension about a company's ability to redeem the bonds and so on.