FCCB overhang crisis brews

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New Delhi, May 20: At least a dozen listed Indian companies will soon have to decide whether to refinance or raise additional equity to service their foreign currency convertible bonds (FCCBs). The sustained dip in the stock markets has ruined the chances of these companies of offering investors the option of converting the bonds into equity at a premium.

The first batch of these FCCBs, which corporate India raised at a very high premium on the back of the big bull run, will start coming up for redemption by October 2009. This means the companies have to prepare now. In the last five years, over 130 Indian companies have raised more than $20 billion (Rs 80,000 crore) in FCCBs. Companies like Subex Azure, Aurobindo, Wockhardt, Bajaj Hindustan and First Source run an FCCB overhang that is large in comparison with their size and cash flows. In contrast, companies like Tata Motors, M&M and Ranbaxy, which also have large amounts of FCCBs, have far less worry because of their large market caps.

The government too could face a problem if some companies ask for permission to refinance (or, raise fresh loans) to service their current debt, abroad. External commercial borrowing rules clearly forbid refinance. But the alternative could heighten redemption pressure on many companies that used the FCCB route as a source of cheap finance. The $110-million issue raised by Wockhardt is the first to come up for redemption, in October 2009. The company had offered a conversion price of Rs 629.80. The shares on May 16 traded at Rs 308.60, resulting in a difference between conversion and current price of 104%. Given its total net debt of $630 million, including the FCCB component, the debt-to-Ebitda ratio was 3.32.

For its $180-million FCCB, Subex Azure offered a conversion price of Rs 897.60, while its share was priced at Rs 141.15 on May 16—a difference of 535.91%. On a total debt load of $225 million, the debt-to-Ebitda ratio stands at 11.25. Or take Aurobindo.

The company’s FCCB of $200 million will come up for redemption in May 2011. But as of now, against a conversion price of Rs 1,483.4 for the bigger issue, the shares are traded at Rs 347.20. That yields a difference of 327.25%. Here, too, on a net debt of $615 million, the company’s debt-to-Ebitda stands at 5.86.