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.
None of these companies were willing to go on record on the issue. The numbers look heavy, said Vipul Dalal, country head-broking, at Elara Capital. ?But let us see if the reset options become inevitable near to the close of the maturity of the FCCBs.?
Unless the share prices of these companies recover in 24 months, investors are unlikely to opt for the equity option. Thus, the debt ratio becomes significant as a means to pay off the FCCBs. As the maturity dates advance, companies have the option of raising additional debt?plain vanilla or again as FCCB, but naturally offering far higher interest that would also dilute equity (in the case of FCCBs). Pushing for additional equity to finance the issues is also made difficult by the overhang of current debt.
This is a very new ballgame for the Indian corporate sector. FCCBs are raised as debt, but carry an underlying conversion option into equity before they mature. The conversion price is set at a premium to the current market price of the company?s shares.
In a bull run this poses no problem as the market reaches the value of the share before the bond matures. But when markets tank, the bondholder will exercise the debt option, as the value of the shares dip below the conversion price.