FCCB redemption to strain India Inc's profit, net worth: Crisil

Indian companies, which favoured the FCCB route to raise funds, are likely to feel an impact on their profitability and see their net worth decline by 17 per cent on redemptions of these bonds.      

A study by Crisil Research on CNX 500 and BSE 500 firms that have issued Foreign Currency Convertible Bonds (FCCB) showed that "on an aggregate basis, on redemption of FCCBs, their net worth would decline by 17 per cent and profit would fall by 11 per cent, as they will have to raise an equivalent amount as debt from the market".      

The redemption of cumulative outstanding FCCBs of CNX 500 and BSE 500 companies is expected to touch Rs 32,000 crore ($6.4 billion) by 2012, the report said.      

The profitability and net worth of the companies that have raised funds through FCCB issue are likely to get impacted as the share prices of several companies have dipped far below the conversion price of outstanding FCCBs amid global slowdown and decline in stock markets.     

As per the report, if the companies redeem the bonds at a premium on the redemption date, they would have to pay a hefty premium of Rs 20,800 crore (17 per cent of their net worth). Further, in order to repay the bondholders, the firms may also have to raise funds in case they do not have adequate cash.

Besides, as these FCCBs were at very low coupon rates, replacing them with bank debt will increase their annual interest cost and impact profits, while the premium paid on redemption will impact their net worth. If companies resort to reset the conversion price, it will lead to higher dilution of shares, which may lead to a further drop in market prices.      

Crisil Research expects most of these companies to go in for redemption of FCCBs, as they would not have sufficient cash for buyback and these bonds are thinly traded. Only those companies that cannot raise debt from the market may opt for resetting of prices.      

The sectors that have high FCCB exposure include steel, pharmaceuticals, telecommunications, information technology, automotive, construction, automobile, electrical equipment and Chemicals.      

"Some of these companies operate in sectors such as steel and commercial vehicles, which are likely to witness a sharp dip in their profits due to the global economic slowdown," the report added.      

In December 2008, the RBI allowed firms to buy back FCCBs prematurely till March 31, 2009, which was later extended till December 2009.

Recently, Reliance Communications repurchased FCCBs worth $25 million, aggregating Rs 1,212.2 million at a discount of 52 per cent.