There has been very little action in terms of buyback of foreign currency convertible bonds (FCCBs) since December last year, when the Reserve Bank of India (RBI) took steps to liberalise norms relating to FCCB repayments.
Only 16 companies have gone in for a partial buyback of FCCBs, worth a total $526 million, while eight more have announced plans for similar buyback schemes.
These numbers pale in comparison to the 158 Indian companies which had issued FCCBs for $20 billion between 2004 and 2008, with less than $3 billion worth of bonds being converted so far. As a result, over $17 billion worth of FCCBs are still outstanding, and they will be redeemed at yield to maturity premium.
| REDUCING THE BURDEN | |||
| Company Name | Size | Buyback | OS |
| Aurobindo Pharma | 150 | 9.65 | 141.35 |
| Financial Technologies | 100 | 9.50 | 90.50 |
| Firstsource | 275 | 49.70 | 225.30 |
| Flex Industries | 85 | 45.00 | 24.00 |
| Geodesic Info | 125 | 8.50 | 116.50 |
| Hotel Leela # | 60 | 42.50 | 40.20 |
| Jaiprakash Associates | 400 | 36.00 | 360.00 |
| Jindal Saw* | 9090 | 60.00 | 7090.20 |
| Jubilant Organosys | 75 | 60.90 | 49.66 |
| Moser Baer | 75 | 39.50 | 57.50 |
| Nahar Industrial | 45 | 35.30 | 9.70 |
| Orchid Chemicals | 175 | 37.80 | 137.20 |
| Pidilite | 40 | 1.10 | 38.90 |
| Radico Khaitan | 50 | 10.00 | 40.00 |
| Reliance Comm | 500 | 35.00 | 465.00 |
| Ruchi Infra | 40 | 15.00 | 25.00 |
| Figures in US dollars (# euro, * yen) Size, buyback and OS (outstanding) in million | |||
There are very few sellers for the FCCBs as they are being quoted at an average discount of 30-35 per cent on overseas exchanges. The bonds, if not converted between 2010 and 2012, will get converted into debt instruments for the issuers. “A more relaxed approach by RBI in terms of the calculation of discount and the method of financing may provide some relief to the issuing companies,” says Prashant Sawant at KNG securities.
Also, while buying back one’s own debt for cheap is considered good financial housekeeping, several companies do not have the cash to do so. Even those having the cash have adopted a far more cautious approach due to the ongoing financial crisis, choosing to hold on to their capital rather than buying their outstanding FCCBs. Some companies are, instead, using their reserves for capital expansion programmes.
“We are seeing a pattern where the companies have got funds, but are not going in for buybacks. Also, the FCCBs have not yet hit price levels which are required to comply with RBI’s buyback rules,” said Sawant.
Additionally, with a sharp depreciation in the value of the rupee against the US dollar in recent weeks, companies have either postponed or realigned their FCCB-buyback plans. A similar situation exists for cases where the debt was raised in euro or yen, as the two currencies have moved in a direction that is opposite to that of the greenback since the issuance of the debt. This has further increased the costs of buybacks.
The buyback of FCCBs has been easier only where revenues are linked to US dollars.
