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The stock of BPO player Firstsource Solutions, trading at Rs 17, has to increase four-fold to Rs 92 before end 2012, for its FCCBs to be converted into equity. If not, the company has to shell out cash to redeem the FCCBs which stood, as of March 2010, at $212 million (Rs 950 crore). There are others.
An analysis of a sample of companies shows that these companies may either have to roll over these bonds by offering more shares (at a lower price for each) or find cash to the tune of Rs 12,000 crore to redeem them.
Indian corporates may have postponed their FCCB woes by resetting the prices during the downturn, but testing times are back again with maturity fast approaching in 2012.
According to data from Bloomberg , FCCBs raised by more than 100 companies are due for maturity between now and end 2012.
Deep discount
The list includes names such as Reliance Communications, Jaiprakash Associates, Financial Technologies and Educomp Solutions. The key worry for these companies is that their stocks are currently at a deep discount to their conversion prices.
Reliance Communications' market price for instance is 88 per cent below its conversion price, while Jaiprakash Associates' stock price is at half the supposed conversion value. If the FCCBs are not converted by the holders, the companies would have to repay the debt on maturity, entailing huge cash outflows. Any fresh borrowing to enable this repayment may also cost higher given the current interest rate scenario.
In all, $9 billion (Rs 40,000 crore), worth of FCCB issuances fall due for maturity in the next 19 months. However, quite a few of these could have been converted into equity if their market prices had been higher at any time in the recent past. FCCBs of Adani Enterprises for example were partly converted when its market price was ruling high in 2010.
According to a report from rating and research agency Crisil, only around 25-30 per cent of the outstanding FCCBs (in value terms) in the CNX 500 universe are likely to get converted into equity. The report states that around 60 per cent of these FCCBs in terms of value belong to companies from the metals and automobile sectors.
Restructured bonds
FCCB was the favourite fund raising instrument of listed companies during 2005-07 thanks to zero coupon rates available then. The conversion rates fixed though became a distant target post the meltdown.
Quite a few companies therefore, used the reset window made available in 2010 to lower the conversion prices. A few others also restructured the bond terms, issuing fresh FCCBs with extended maturity and higher coupon rate. Tata Steel for instance resorted to such an option in November 2009.
However, these strategies would typically result in higher equity dilution, if the bonds are converted.
Companies such as Suzlon Energy, Geetanjali Gems, KEI Industries, and Subex had restructured their conversion prices for FCCBs falling due in 2011 and 2012. Some companies did not resort to this move fearing sharp dilution in equity. Reliance Communications is an example.
Not resorting to restructuring leaves little choice but to redeem the bonds. Companies such as Reliance Communication, Aban Offshore, Ranbaxy, India Cements, Jubilant Life Sciences and Hindustan Construction for instance chose to redeem FCCBs that were up for maturity in the first five months of 2011 given that the conversion price was way above market price.
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