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.
?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.
Convincing shareholders about the need to restructure FCCBs is not easy, either. KPMG director of restructuring services Bhavesh Parekh said, ?Shareholders’ nod for FCCB restructuring varies. The main criterion is the visibility of the business and capability of the management. The management has to convince shareholders of the profit and recovery of the money. Though large corporate groups have the trust of shareholders and can restructure the FCCBs successfully, smaller firms without deep pockets may opt for a one-time settlement.?
Kotak Investment Banking executive director-M&A Sourav Mallik, however, believes it all boils down to basic economics: ?If there is a redemption period of three to five years, that does not mean the value of the bond is going down. At restructuring, the shareholder is offered an amount higher than the value he holds today.? Hence, there is a possibility of a majority of shareholders, irrespective of the size of the company, approving the restructuring plans, he adds. Tata Steel, for instance, said the fresh FCCBs would have a yield-to-maturity of 4.5% and maturity in November 2014. The bonds are convertible into shares at Rs 605.53 each, a 15% premium to the closing price of the company’s shares just prior to the announcement earlier this month.
Avendus Capital executive director Ritesh Chandra agrees. ?More companies, whether mid-cap or large, will restructure their FCCBs. For defaulting companies as well as shareholders, the options are limited. In most cases, shareholders may agree.?
