| Rally eases redemption pressure on FCCB issuers |
| BG Shirsat / Mumbai September 22, 2009, 0:14 IST |
Convertible bonds from large-cap companies being sought by foreign investors.
Considering the flop show in premature buyback of foreign currency convertible bonds (FCCBs), the V-shape recovery in equity markets since the March 9 low is being seen as a blessing for FCCB issuers. The current surge would see bonds worth $7.57 billion converted at pre-determined prices. Of this, FCCBs worth $2.32 billion (Rs 11,305 crore at the current conversion rate) are fully ripe for conversion as share prices of the issuer companies are above or marginally lower than the conversion prices.
Moreover, continuation of the V-shape recovery from the current levels till markets get back to all-time highs will see FCCBs worth $5.25 billion receive conversion advice from bond-holders. (Click here for FCCB data table)
Though shares of these companies are trading 30-50 per cent below the proposed conversion prices, considering the 25-30 per cent premium taken over the market prices prevailing on issue dates, the current prices are near or 25 per cent below the issue prices. It is anticipated that these bonds could start trading at a premium if the Sensex hits the 21,200 level again.
FCCBs worth $3.59 billion could be converted before the yield-to-maturity period as most of these bonds will get redeemed only in 2012 and 2013. The current market prices of companies which issued these bonds are at a 50-65 per cent discount over the conversion prices.
If the market value of the issuer companies moves with the benchmark indices, the share prices of these companies could go up by 30-35 per cent. Also, if these companies reset prices before the redemption dates, we may see $3.59 billion of FCCBs converted into equity shares.
However, FCCBs worth $1.44 billion may face redemption blues and issuers will have no option but to redeem these at the yield-to-maturity premium. On an aggregate basis, FCCBs worth $12.59 billion were outstanding on September 18.
If these bonds are not converted into equity, they will be redeemed on maturity for $16.37 billion, considering an average yield-to-maturity premium of around 30 per cent. FCCBs worth $83 million are lined up for redemption in 2009-10, $2.93 billion in 2010-11, $4.40 billion in 2011-12 and $5.18 billion in 2012-13.
The buyback scheme of the Reserve Bank of India (RBI) was a flop, with 17 companies buying back $472 million FCCBs at an average discount of 39 per cent. Though the buyback scheme was
intended to provide a lucrative exit opportunity for companies stuck with FCCBs, very few could exercise it.
Under RBI guidelines, the issuers are required to buy back FCCB-utilising foreign currency funds held in India or abroad, fresh external commercial borrowing (ECB) and internal accruals at stipulated minimum discounts to book value ranging from 15 per cent to 50 per cent.
Nevertheless, 17 companies made a profit of $182 million in the buyback scheme. Tata Motors repurchased ¥300 million at an average discount of 54.27 per cent and made a profit of ¥137 million.
First Source Solutions and JSW Steel repurchased FCCBs worth $50 million each at a discount of around 50 per cent. Jubilant Organosys repurchased FCCBs worth $59.7 million at an average discount of 17.8 per cent on the face value and around 42 per cent on the yield-to-maturity value. In other words, Jubilant gained $19.2 million on this cancellation.
The other companies that have repurchased FCCBs at a discount are 3i Infotech, Jaiprakash Associates, Orchid Chemicals, Reliance Communication, Tulip IT Services and Era Construction.
Unavailability of surplus cash and difficulties in raising fresh ECBs kept corporates away from the buyback. However, some corporates preferred to hold cash in hand while others continued with their ongoing capex plans rather than opting for a buyback.
Suzlon Energy recently came out with an innovative non-cash buyback proposal, whereby the company swapped the earlier issued bonds with new FCCBs at a discount. In this, the conversion price has been close to the current market price, thereby replacing the cash outflow with chances of future equity dilution.
Wockhardt came out with two options for its FCCBs worth $110 million to be redeemed in October.
The bond-holders have been offered a cash buyback option or exchange of existing bonds for preference shares of the company equivalent to the redemption value. In the first option, Wockhardt would buy back the bonds only if the bond-holders offer average discounts in excess of 65 per cent of the redemption value.
In the second option, half the preference shares will be optionally convertible to equity after October 25, 2015, at the then applicable Sebi formula. The balance half will get a cumulative dividend and be redeemed at a premium of 38 per cent on December 31, 2018.
The current rally has had a positive impact on FCCB investors as they have started converting bonds into equity shares.
In the past three months. as many as 12 companies have converted FCCBs valued at Rs 455 crore. An even more encouraging development in the current rally has been a rise in unofficial premium for FCCBs on the over-the-counter (OTC) segment of the Singapore Stock Exchange.
Data from Bloomberg indicate that prices of 30 of the 55 listed FCCBs are at a premium to their issue prices, compared to only four on March 9. Of the remaining 25 FCCBs, eight are currently trading at a 1-20 per cent discount and another 10 are trading at a 20-50 per cent discount.
The data suggest that outstanding FCCBs worth $532 million of Lupin Pharmaceuticals, Tata Power, HDFC, Adani Enterprises, Aurobindo Pharma and Educomp Solutions will be converted into equity shares as these bonds are trading at a premium on OTC exchanges and the current market value of local shares are above the conversion prices.
The FCCBs of companies such as Jaiprakash Associates, Uttam Galva, Nava Bharat Venture, Jain Irrigation, Reliance Natural, Core Projects, Welspun Gujarat, Bartronics India, IVRCL, Dishman Pharma, Dolphin Offshore, Tata Chemicals, Monnet Ispat and Deccan Chronicle will also be converted into equity as their shares are trading at a premium.
| REPURCHASE DEALS | |||||
| Name | Maturity period | Issuing currency | Issue size | FCCB repurchased | Estimated profit |
| 3i Infotech | Jul-12 | USD | 100 | 27.1 | 13.4 |
| 3i Infotech | Apr-12 | EUR | 30 | 4.0 | 2.0 |
| Financial Techno | Dec-11 | USD | 100 | 9.5 | 3.6 |
| First Source | Dec-12 | USD | 275 | 49.7 | 25.7 |
| Geodesic Info | Jan-13 | USD | 125 | 11.5 | 4.6 |
| Hotel Leela | Apr-12 | USD | 100 | 33.4 | 0.1 |
| Hotel Leela | Sep-10 | EUR | 60 | 12.2 | NA |
| JP Assoc | Sep-12 | USD | 400 | 50.0 | 18.8 |
| JSW Steel | Jun-12 | USD | 325 | 49.8 | 24.1 |
| Jubilant Organ | May-10 | USD | 75 | 3.0 | 0.5 |
| Jubilant Organ | May-11 | USD | 200 | 57.9 | 11.8 |
| M&M | Apr-11 | USD | 200 | 10.5 | 0.6 |
| Orchid Chem | Feb-12 | USD | 175 | 37.8 | 21.4 |
| Orchid Chem | Nov-10 | USD | 42.5 | 2.3 | 0.4 |
| Pidilite Ind | Dec-12 | ||||
