Size and timing of the issue depend on banks' advice

Shyam G. Menon

Takeoff reasons


Aviation industry

sources argue that it may be unfair to draw generic cue against FCCBs, from a temporary market decline.

Volatility in

share price also helps when the instrument is tradable as is the case with FCCB

Mumbai, May 26

Jet Airways has begun preliminary work on its proposed issue of foreign currency convertible bonds (FCCB), a senior official said on Thursday.

Asked about issue size, he said: "it is too early to say anything." The size and timing of the exercise including details such as coupon rate and conversion price would all depend on what the banks' advice.

But it is understood the company does not see the recent meltdown in Indian share values as a reason to postpone the offering.

At its press briefing of April 29, Jet Airways had disclosed that the company's planned $2.5 billion fleet augmentation programme would be backed by two separate instalments of fund raising - a $500-million FCCB issue by end-May and later, a $300-million domestic equity raising exercise.

In the aftermath of last week's stock market crash with near continuous days of steep fall in market indices, senior corporate officials had expressed worry over imminent IPOs and FCCBs.

In the case of IPOs, the concern was whether the market would accept high pricing while on FCCBs fear was that lower domestic share price would render the conversion price unattractive for foreign investors.

Further one of the reasons for FCCB preference at issuers had been the lower interest rate, typically commanded due to the trading and conversion options in the instrument. The argument last week was that as conversion price becomes lower as a function of reduced domestic stock market price, investors would force up the interest rate, making FCCB unattractive for issuers.

However, aviation industry sources argue that it may be unfair to draw generic cue against FCCBs, from a temporary market decline.

Volatile movement

Jet Airways, for example, has a history of volatile share price - over the last year, a low of Rs 715 and a high of Rs 1,370. This provides the stock with sufficient swing to meet conversion at an attractive premium particularly when juxtaposed on the usual 7-10 years that FCCBs take to get converted.

The Jet stock today closed on the BSE at Rs 760.65; it was Rs 885 a week ago.

Volatility in share price also helps when the instrument is tradable as is the case with FCCB. And notwithstanding the argument of reduced differential between FCCB interest rate and that of pure debt owing to lower share price, industry sources said, for companies having sizable foreign exchange earnings (like Jet), the attraction for overseas debt will remain.

For observers, there is an additional scenario to contemplate: would Jet's fund raising maintain the said ratio between FCCB and domestic equity or would the latter score if the FCCB size gets pruned?

It is for the advisor banks to decide, but there is underlying sentiment that after last week's fury on the markets, raising large chunks of domestic equity may be tougher than FCCB, particularly in the case of already listed stocks.

(This article was published in the Business Line print edition dated May 27, 2006)
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