The Hindu Business Line : Companies cut conversion price to resolve FCCB tangle

Foreign Currency Convertible Bonds (FCCBs), which in a bull market were seen as a low-cost option for Indian companies to raise funds, are now turning out to be millstones around their necks. Faced with ballooning debt after the stock prices have plunged, companies are trying to sweeten the conversion option by lowering the prices at which FCCB holders can swap their bonds for shares. SpiceJet, Hotel Leela Ventures, Pioneer Embroideries and Simbhaoli Sugars are some of the companies that have reset the price at which FCCBs will be swapped into shares, over the past few months. This means taking on a bigger expansion in their equity base than originally planned.

Hobson’s choice

In the secular bull market from 2003 to 2007, FCCBs were usually issued under the assumption that holders would opt to convert bonds into the issuing company’s shares, sometime before the bonds came up for redemption. Conversion prices were set at a hefty premium, based on the assumption that stock prices would continue to rise, offering bondholders an attractive exit opportunity. This house of cards has come tumbling down with the unexpected market meltdown post-January, which has trimmed some mid- and small-cap stock values by 70-80 per cent. Companies with large FCCBs outstanding are now faced with a Hobson’s choice. With bondholders showing no inclination to convert, issuers may be forced to honour their FCCB liabilities as borrowings when they come up for redemption. For some small- and mid-sized companies, such debt may be well beyond their means. The only alternative is to make it more attractive for bondholders to opt for conversion, by offering a much more attractive swap price. This means more equity dilution, as more shares now have to be issued to raise the same quantum of funds.

The affected ones

Recent months have seen a few small- and mid-sized companies invoke “reset” clauses in their FCCB issues to effect a drastic reduction in their FCCB conversion price. Simbhaoli Sugars has trimmed the conversion price for the FCCBs due in March 2011, from Rs 170 to Rs 153, Pioneer Embroideries has cut it from Rs 249 to Rs 101. Last week, low-cost airline SpiceJet proposed reducing its FCCB conversion price from Rs 57 to Rs 25 per share, having already trimmed it down last year from Rs 90 to Rs 57. In effect, SpiceJet may now have to issue 3.5 times more equity shares to bondholders who opt for conversion than originally planned. This may mean higher equity dilution and a larger equity base to service when the company turns profitable. But with the company running large accumulated losses on its balance sheet, it simply may not have the option of repaying its loan liability in full.

While a few companies have reset conversion prices as a way out of the FCCB tangle, others are yet to find a resolution to the problem. Reliance Communications, Tata Motors and Jaiprakash Industries in the large-cap pack and Subex, Aurobindo Pharma, Bharat Forge and Wockhardt among mid-sized companies, are a few issuers whose stock prices are now hovering significantly below their FCCB conversion prices.

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