Chemplast had planned the FCCB to fund its ship acquisition programme with a coupon rate at 100 to 150 basis points over Libor. These bonds would be converted at the option of the lender at the end of five years. A put and call option only at the end of the five years helps to earn better by efficiently deploying the cash flows, Chemplast executive director (finance) PS Jayaraman said. In that aspect it is better than an external commercial borrowing (ECB) which generally has put and call options at earlier intervals thereby impeding cashflow.

A domestic financial institution's (DFI) guaranteewould enable the company to get a better coupon rate as the debt takes the form of a credit enhancement bond. A DFI, based on its experience with the borrower and its credit worthiness, undertakes to guarantee the loan to the foreign lender, which acts as the security.

The borrower mortgages the ship in favour of the DFI who charges a guarantee fee for the risk it is proposing to undertake.The obvious catch in this scheme of arrangement is that the guarantee fee paid to the DFI should be lower than the savings the borrower gets on his coupon rate. But in general with DFIs being quasi-governmental organisations the guarantee is one step lower than a sovereign guarantee and borrower gets a good coupon rate.

The company has already identified a few lenders but the happenings in the last one month has delayed its plans. With the ocean freight market continuing to go through a bad phase, the company feels that this is the best time to buy ships to augment its fleet which comprises five dry bulk carriers andthree tankers.

Its experience in the shipping business has not been as bitter as many other companies in the country mainly because it managed to place most of its dry bulk carriers on long-time charter at a time when the freight rates were high.

The tanker freight rates, however, continue to do better as the tonnage in this segment is comparatively low considering India's reliance on crude imports.