Strides Arcolab Ltd has witnessed a surge in share price and share trading volume following the redemption of outstanding Foreign Currency Convertible Bonds (FCCBs).
The company said that it had redeemed the outstanding $80-million FCCBs on the due date. The total payout was $116 million, including redemption premium of 45.06 per cent.
It had originally raised $100 million through FCCB route in 2007 and had bought back $20 million of it in 2009.
The company said that it had used its cash balance to fund the redemption and there are no further outstanding FCCBs. The company has brought down the debt equity ratio from 1.67 in December 2011 to 0.75 now.
Redemption of bonds, rather than converting them into shares, sent a positive signal for the stock which moved up by Rs 20.05 to Rs 738.70 on the BSE in the morning trade.
There was a surge in trading volume with about 1.44 lakh shares being traded compared to the two-week average of about 50,000 shares.
The fact that the company had used its own cash reserve to payout the outstanding bonds at a time when the INR had depreciated sharply against the greenback and that the redemption would avoid any dilution of the equity probably had contributed to the positive investor response.
That Strides Arcolab did not have to strain itself much to pay back Rs 640 crore should come as no surprise because way back in January, when the company sold off its generics business (to Watson), it had said it would use the proceeds to redeem the FCCBs in June.
The divestment grossed around $300 million, and even after some “exit commitments” there was sufficient cash left, which the company had even then earmarked for redeeming the FCCBs.
In a conference call in April, the company had said it has about Rs 900 crore of cash.
The company’s Chief Financial Officer, Dr T.S. Rangan, has described it as "substantial deleveraging of balance sheet''.
“We are very pleased with what we did today,” Dr Rangan told Business Line today. The debt today is only three-fourths of equity, the company has no plans to raise debt funds, Dr Rangan said, but also observed that business was growing.
The successful buyback of the convertible bonds is to be seen against the backdrop of large redemptions falling due this year — estimated to be between $4 billion and $5 billion — and reports that Indian companies are struggling to find the resources to buyback the bonds.
After Strides Arcolab, all eyes will now be turned to Rolta and JSW Steel, whose FCCBs are due to be redeemed this month. The outstanding amounts for Rolta and JSW Steel, including redemption premium, are Rs 740 crore and Rs 2,170 crore respectively.
A recent report of rating agency Standard & Poor's, that 21 companies with FCCB that are due for redemption in the rest of 2012 may default, created a flutter in the corporate circles.
Another report of Edelweiss Research noted that as on May 28, 2012, there were 34 BSE 500 companies that had outstanding FCCBs of $6 billion. “In our estimate, of the above, the likelihood of conversion in the case of 28 companies looks remote,” Edelweiss said.
For 20 of these companies, the bonds will need to be redeemed in the current financial year. Edelweiss calculated the total outflow for these to be $4.4 billion.
Edelweiss has observed that for those companies that are doing their redemption now, FCCB has not been a cheaper source of funding than domestic borrowing. It calculated the average cost of borrowing as 12.2 per cent.
Thirteen more companies (Refer table) may have to redeem their FCCBs in the rest of 2012.