The Reserve Bank of India’s permission to allow Indian companies to do a premature buyback of the foreign currency convertible bonds (FCCBs) using rupee resources, subject to few caps, provides a new window for companies but its unlikely that companies would be rushing to buy back their bonds.
The RBI will consider applications for buyback of bonds using rupee resources, provided they are bought at a minimum discount of 25 per cent to the book value, the buyback is limited to US $50 million per company, and the resources for buyback are drawn out of internal accruals of the company.
Corporate observers feel that given the conditions, this is likely to benefit mid-cap companies who have issued FCCBs of smaller denomination, say $50 million, or have already converted a significant portion of it. “Companies would like to buy back at a maximum discount,’’ explained Arvind Parakh, director, Jindal Stainless.
“Allowing the rupee resources to buy back the FCCBs is a great move, especially as getting dollar funding is next to impossible,’’ said Hiranya Ashar, CFO, Rolta India. ‘’The only constraint is the quantum of buyback is limited to $50 million,’’ said Subhash Menon, CMD, Subex Ltd, a communication service provider.
To enable a buyback, the seller should be willing to sell the bonds at a discount, which they are willing as most companies are trading at huge discounts to the conversion price of FCCBs. Secondly, the buyer must have money to buy back.
And that’s the dilemma for many companies. “It’s a catch-22 situation, as we will have to decide whether we should use the cash for growth/acquisition or reduce our debt,” said Ashar. And that seems to be the problem with this proposal.
“Over 200 firms had opted to raise funds through this route when the going was good. In some cases, the prices are eight times the current share value of the company. The situation that some of these firms are in seems that they cannot for some time even raise funds through internal accruals,” said a banker.
| GEARING UP FOR ACTION |
| RULES OF THE GAME |
| * Window open till March 31, 2009 |
| * Buyback subject to consent of bond-holder |
| * Bonds bought to be cancelled, can’t be re-issued, re-sold |
| * Firms to open escrow account |
| Through automatic route |
| * Use foreign currency funds abroad, in India or EEFC a/c |
| * Fresh ECB funding with cost ceiling of Libor+200 bps |
| * Buyback at min 15% discount to the book value of FCCB |
| Through approval route |
| * Use rupee resources, company's internal accruals |
| * Buyback should not exceed $50 million per company |
| * Buyback at min 25% discount to the book value of FCCB |
Yet, some companies are actively considering a buyback. “We definitely see an opportunity to convert our existing FCCBs, provided we get good discount and structures,’’ said Amar Chintopanth, executive director and CFO, 3i Infotech.
| THE BIG BOYS CLUB Top 15 by amount raised | |||
| Company | Market price (in Rs) | Conversion price (in Rs) | Outstanding (in $mn) |
| Reliance Comm | 226.70 | 480.68 | 1,000 |
| Tata Steel | 215.75 | 762.70 | 875 |
| Tata Motors | 181.20 | 573.10 | 490 |
| Ranbaxy Labs | 208.60 | 657.11 | 440 |
| GTL Infra | 36.05 | 53.04 | 300 |
| Firstsource | 16.40 | 95.17 | 275 |
| Amtek Auto | 71.45 | 209.83 | 250 |
| Adani Enterprise | 411.00 | 1184.59 | 250 |
| Sterling Biotech | 179.55 | 152.78 | 250 |
| Suzlon Energy | 58.50 | 377.42 | 200 |
| M&M | 375.55 | 323.52 | 200 |
| Subex Azure | 38.75 | 602.92 | 180 |
| Orchid Chem | 124.55 | 243.80 | 175 |
| Aurobindo Pharma | 121.70 | 522.03 | 150 |
| Rolta India | 177.40 | 366.44 | 150 |
| Source: Bloomberg | |||
But why would lenders want to sell? As investors shy away from the stock market, volumes and liquidity have dried up. Investors like hedge funds who are facing redemption pressures at home, could be desperate to exit such investments given that many mid-cap stocks have become illiquid.
Given the $50 million cap, buying back FCCBs using rupee resources is not an option for larger companies, few of whom have even issued FCCBs worth $300 million to $1000 million.
They can, however, use foreign currency resources (money parked in Exporters External Foreign Currency Accounts or money raised through fresh ECBs), for which they no longer need an approval from the RBI. But such buybacks have to be at a 15 per cent discount to the face value.
Today, many big companies who have issued FCCBs, may not have the cash to buy back their bonds or may want to conserve their cash to ride the downturn. As central banks around the world effect rate cuts and there’s greater liquidity in the global markets in the next six months, interest rates are likely to fall sharply except perhaps in markets like India and China.
“Approvals take time, which you don’t need now. This window can be activated in one year’s time. We are entering a 1 per cent world as interest rates globally will come down significantly,’’ added Parekh. Once that happens, many companies will go in for fresh ECBs and can use the proceeds to buyback the FCCBs.
