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FCCBs are convertible bonds, having a mix of debt and equity components. It acts as a bond by making regular coupon and principal payments. But a bondholder will have the option to convert the bond into stocks of the company.
FCCB issuances by Indian firms, at $20 billion (Rs 1 lakh crore today) in 2008, now stand at less than $5 billion, according to an estimate by UK-based KNG Securities LLP, an independent fixed income specialist firm. It is also estimated fresh issuances in 2012 were less than $500 million.
According to Prashant Sawant, senior analyst with London-based KNG Securities, since 2008, recession in developed markets and a resultant bear period in equity markets made a majority of FCCBs out of money. This means their conversion price is much higher than current equity prices. “Poor company financials (due to global and domestic slowdown) resulted in many companies opting out for restructuring of these FCCBs and a few others defaulted on FCCB redemptions,” said Sawant.
Besides, relaxation of fund-raising through qualified institutional placement (QIP) and greater flexibility to invest in Indian equity have provided more avenues to attract foreign funds to India, said Sawant. Since 2010, many firms have followed the route of restructuring and a few others have defaulted on FCCB redemption on maturity. Due to sluggish domestic growth and recessionary developed economies, this trend continued in 2012 and 11 per cent of the outstanding amount was restructured and 23 per cent of the outstanding amount was not paid on maturity. Suzlon Energy and Moser Baer India are some of the heavyweights which defaulted on FCCB redemption.
“There are appetite for Asian FCCB issuances. But for India, the situation is different. Investors are flush with funds and looking for opportunities in Asia, but at least on the FCCB front, mid-cap Indian companies are not on their radar. No local bank is willing to give credit support. For these mid-cap companies, the issue sizes are small and there is no hedge available with the investors,” said Vishal Kabra, vice-president (securities division) at London-based First International Group, a provider of brokerage, trading and advice specialising in international Indian securities.
According to estimates of KNG Securities, it has been just about two months since the beginning of 2013, and a few companies have failed to pay on maturity for a total amount payable $235 million. The revival of the issuances now lies with issuances of big companies coming up which includes Tatas and Birlas.
The all-in-cost ceiling over six-month Libor for FCCB loans of duration ranging from more than three years to five years is 350 basis points. For long-term borrowings — duration more than five years — it is six-month Libor plus 500 basis points.
According to Kabra, this limit acts as another constraint. “The investors would like to be covered with higher coupon if they want to take a risk. That is also not possible right now.”
DEFAULT DOSSIER
- FCCB issuance dues below $5 billion currently
- It stood at $20 billion in 2008
- FCCB defaults result in investors shying away
- This is the case particularly with mid-cap companies
- In 2013, a few firms have failed to pay on $235-mn maturity
