FCCB servicing to stretch finances as shares trade below conversion price

Written by Rishi Raj | New Delhi | Updated: Mar 12 2011, 05:29am hrs
Theres trouble ahead for India Inc. More than 50 companies which raised money by issuing foreign currency convertible bonds (FCCBs) during 2006-07 are approaching their maturity dates within a year. In most cases, the story is the same their stocks are ruling much lower than the conversion price of the bonds into equity. The redemption amount, in most cases, is quite high leaving the only option for them to either refinance the bonds or raise equity. Both options are hard for the companies as raising equity in this market is not only difficult but also requires bold decisions and refinancing them would lead to heavy dilution of their equity.

Of the several such issuers, FE picked up four companies whose FCCBs are coming up for conversion between March 18 and July 27 as they are the ones who would have to exercise the hardest options.

Take for instance, Reliance Communications (RCom), the flagship company of the Anil Dhirubhai Ambani Group. The company had raised $500 million through FCCBs, of which the outstanding amount is $296 million and the maturity date is May 10, 2011. The intra-day trading price of the companys share on March 9 was R91 against the conversion price of R689.8, meaning it is 86.8% below the realistic base conversion price. The redemption amount works out to $373.7 million.

The company will surely have to take some bold decisions, said Jagannathan Thunuguntla, equity head at SMC Capital. Analysts are looking at the company selling off its tower business through which it could raise some money. Efforts to offload 26% stake in RCom to a strategic investor has not met with any success so far.

The company has signed a $1.3 billion loan facility with China Development Bank but all of it cannot be used for servicing FCCBs since it has to service debts raised for 3G spectrum and equipment costs, analyst said. The company has a debt of R32,000 crore on its books.

FCCBs offer best of both the world debt and equity in the best of days. However, they can show up the bad side of debt and equity in bad market conditions, adds Thunuguntla. He has a point. These are not the only FCCBs RCom has. Its $1-billion FCCB is up for maturity on March 1, 2012. The outstanding amount as on date for it is $925.3 million. And if one goes by its intra-day share price of Rs 91 as on March 9, it is 90.6% below the realistic conversion price. Much ahead of RCom comes the maturity date for the FCCBs of Ranbaxy Laboratories. In its case, the maturity date is March 18 and the outstanding amount is $440 million. The realistic base price for conversion at R1,040.7 is much higher than R448.6 at which its shares are trading. The redemption pressure on it will be $557 million. When contacted about how the company plans to tackle the situation, Arun Sawhney, managing director said: We have a healthy cash position to buy back the FCCBs. Analysts said that Ranbaxy may be in a better shape than RCom since its parent firm Daiichi Sankyo has the financial wherewithal. Another pharma firm, Jubilant Life sciences (formerly Jubilant Organosys) is also nearing the maturity date on May 20, 2011. In its case, the outstanding amount is $142.1 million, which is 75% below the conversion price. We have already tied up sufficient funds through a combination of rupee and dollar debt to repay the FCCBs on the due date. We have tied up a mix of both dollar and rupees and, we are going to draw the money, in two months. Based on the current rate, it will be the average cost of both rupee and dollar put together, will be less than FCCB coupon rate of 7 %, R Sankaraiah, CFO had said last month in an analyst call on the forthcoming due date for FCCBs repayment. Radico Khaitans turn comes up on July 27, 2011 and its shares are trading roughly 41.1% below the conversion price.