FCCB restructuring will be limited, say bankers

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Mumbai: Indian companies that had bankrolled acquisitions or expansion with foreign currency convertible bonds (FCCBs) between 2005 and 2007 are increasingly looking to ease the burden of imminent redemption, either by restructuring the bonds or via a buyback. Tata Steel, Suzlon, Amtek and Subex Azure, for instance, have restructured their FCCBs, while Hotel Leela Venture, JSW Steel, 3iInfotech and Jaiprakash Associates preferred the buyback route.

However, according to a cross-section of merchant bankers and private equity players, although several companies raised FCCB funds in the boom period, only large players would be in a position to restructure them. Moreover, the success of this option would depend on the exchange offer and promoters’ willingness to dilute.

Since 2003-04, Indian companies have raised FCCBs worth $20 billion, according to broking & research firm CLSA. While some issuances are due for redemption over the next ten months, most are due in 2011-12. Many companies issued zero-coupon bonds and a yield-to-maturity structure, hoping they would be converted into equity. But after markets crashed following the global meltdown, the share price of these companies fell below the conversion price and investors held on to their bonds, waiting to redeem them at maturity.

Now, companies are looking to issue fresh FCCBs with a new maturity period, which in effect postpones the redemption. Also, with markets on an upswing, they believe the probability some bonds being converted into equity is higher.

However, there is a catch. According to Anup Agarwal, vice-president at investment banking firm Jefferies India, “Restructuring would largely be restricted to large players, as bondholders would only agree to it in cases where the long-term story is good and there is underlying liquidity in shares for them to get on exit.”

“Also, it’s important that the offer made to investors is reasonable, as in most cases, companies are not giving cash, but bonds or shares. Hence, investors need to evaluate if they are better off selling their existing bonds in the market or exchanging them for new bonds,” Agarwal added.

Recently, Tata Steel successfully completed an exchange of its convertible bonds worth $875 million for fresh bonds. “While there are several companies that could get their debt liability restructured, this will require promoters’ willingness to dilute,” Agarwal said.