FCCB repayments may test Indian cos
MUMBAI: India Inc is bracing up for repayment of foreign currency convertible bonds (FCCBs) as they fast approach the maturity or conversion dates in 2011. Many of them are discussing refinance options in a market facing liquidity and inflationary pressures.
And these companies may be left with no option but to buyback or repay bondholders as their stocks are trading lower than the price at which these bonds would convert into equity shares.
It is estimated that Indian companies raised over $20 billion in FCCBs in the four years preceding the market crash of 2008. The FCCB binge had peaked around 2006-07, with these bonds raised then coming up for conversion five years later. Most of these were zero coupon bonds with significant redemption premium, which effectively accounts for yield-to-premium ( YTM )) for bond-holders.
Jubilant Life Sciences ($142 million), Radico Khaitan ($35 million), Hindustan Construction Company ($96 million), Punj Lloyd ($49 million), Bajaj Hindustan ($100 million), Tata Motors (300 million), Reliance Communications ($297 million) and Aurobindo Pharma ($149 million ) are among the companies that have FCCBs reaching maturity in the next six-eight months.
The final repayment will be significantly higher for many companies after factoring in the redemption premium or the backended yield. Among the firms mentioned above, only Tata Motors and Aurobindo Pharma have their share prices above the conversion price, at least for now.
A company has four options in case the conversion price, which was agreed about five years ago, is far above the current market valueto repay FCCB holders through internal accruals, ! to borro w from the market and pay back the outstanding, raise equity and pay back the bond holders, or request for extension to FCCB holders.
A buyback with redemption premium looks the most likely outcome as the companies do not expect their share price to perk up following a flat-to-negative outlook for Indian markets this year. While conversions are due for some bigger firms like Tata Motors and Reliance Communications , the focus stays on the mid-caps and how they would deal with the bond debt.
In most cases, companies go for borrowing from the market and pay back FCCB holders, said a top official at a domestic broking house. But since such borrowings are done by companies which have underperformed, for whatever reasons, the lenders try to extract their pound of flesh by charging high rates, the official added. Jubilants repayment will be totaling $202 million after including the additional $60 million payout in yield.
Hedge funds hoping for strategic play in FCCB market
Similarly, it would cost Hindustan Construction Co (HCC) and Bajaj Hindustan roughly about $130 million to payback bond-holders. Radicos overall hit could be around $45 million, and that of Punj Lloyd at $62 million , sources added.
We are in a comfortable position to repay this amount on the due date in May this year, as we have tied up funds required to repay this amount on maturity, if not converted, said R Sankaraiah, executive director, Finance, Jubilant Life Sciences.
Radicos MD Abhishek Khaitan said the company was prepared to repay the FCCBs with short-term loans, while HCC spokesperson said his company has been making provisions and also has undrawn credit-lines to meet repayment obligations. A Bajaj Hindustan executive said that it will be repaying the FCCBs, which are due for redemption on February 1. This will be met from the! company s cash reserves.
Reliance Communications has FCCBs worth about $297 million due in August, and a total of $1.22 billion by early next year. Tata Motors has $300 million due by April.
The head of securities at a global investment bank said he expected the bond-holders to restructure if the market turned worse and mid-caps found refinancing tough. They (bond-holders ) are seasoned risk investors by nature and they would not precipitate a major default scare, he said. But the recent events involving Wockhardt, which defaulted on FCCB repayments in 2009 and the bond-holders led by hedge fund QVT has not been pretty with both of them entangled in a legal process now.
The bond-holders, who offered to sell at deep discount in the distress period of 2008-09, are not doing the same any longer. There has been a churn among the FCCB industry with some large hedge funds buying out struggling bond-holders in recent past. And one would suspect that they are hoping for some strategic playlike Sun Pharma acquiring Wockhardt bondsin case of a problem, said a bond market observer.
At least a few companies facing the FCCB pressure also have a strained balance sheet with high debt and sluggish profit, and additional debt burden at higher interest rates would be threatening to wipe out their net profits.
The head of a finance company has an interesting take on companies whose stocks are deep out of the money, meaning the current market price of the stock is far below the conversion price. The promoters of Indian companies, which are almost sure they wont have to go back to foreign fund managers, usually default on FCCBs. And Indian laws are such that it becomes futile for bond-holders to take these promoters and companies to task, he said.
One such example is Pyramid Saim! ira. In 2007, the company had raised $90 million through an FCCB issue, but since the company has gone into liquidation, the FCCB holders have almost no recourse to get their money back.
And these companies may be left with no option but to buyback or repay bondholders as their stocks are trading lower than the price at which these bonds would convert into equity shares.
It is estimated that Indian companies raised over $20 billion in FCCBs in the four years preceding the market crash of 2008. The FCCB binge had peaked around 2006-07, with these bonds raised then coming up for conversion five years later. Most of these were zero coupon bonds with significant redemption premium, which effectively accounts for yield-to-premium ( YTM )) for bond-holders.
Jubilant Life Sciences ($142 million), Radico Khaitan ($35 million), Hindustan Construction Company ($96 million), Punj Lloyd ($49 million), Bajaj Hindustan ($100 million), Tata Motors (300 million), Reliance Communications ($297 million) and Aurobindo Pharma ($149 million ) are among the companies that have FCCBs reaching maturity in the next six-eight months.
The final repayment will be significantly higher for many companies after factoring in the redemption premium or the backended yield. Among the firms mentioned above, only Tata Motors and Aurobindo Pharma have their share prices above the conversion price, at least for now.
A company has four options in case the conversion price, which was agreed about five years ago, is far above the current market valueto repay FCCB holders through internal accruals, ! to borro w from the market and pay back the outstanding, raise equity and pay back the bond holders, or request for extension to FCCB holders.
A buyback with redemption premium looks the most likely outcome as the companies do not expect their share price to perk up following a flat-to-negative outlook for Indian markets this year. While conversions are due for some bigger firms like Tata Motors and Reliance Communications , the focus stays on the mid-caps and how they would deal with the bond debt.
In most cases, companies go for borrowing from the market and pay back FCCB holders, said a top official at a domestic broking house. But since such borrowings are done by companies which have underperformed, for whatever reasons, the lenders try to extract their pound of flesh by charging high rates, the official added. Jubilants repayment will be totaling $202 million after including the additional $60 million payout in yield.
Hedge funds hoping for strategic play in FCCB market
Similarly, it would cost Hindustan Construction Co (HCC) and Bajaj Hindustan roughly about $130 million to payback bond-holders. Radicos overall hit could be around $45 million, and that of Punj Lloyd at $62 million , sources added.
We are in a comfortable position to repay this amount on the due date in May this year, as we have tied up funds required to repay this amount on maturity, if not converted, said R Sankaraiah, executive director, Finance, Jubilant Life Sciences.
Radicos MD Abhishek Khaitan said the company was prepared to repay the FCCBs with short-term loans, while HCC spokesperson said his company has been making provisions and also has undrawn credit-lines to meet repayment obligations. A Bajaj Hindustan executive said that it will be repaying the FCCBs, which are due for redemption on February 1. This will be met from the! company s cash reserves.
Reliance Communications has FCCBs worth about $297 million due in August, and a total of $1.22 billion by early next year. Tata Motors has $300 million due by April.
The head of securities at a global investment bank said he expected the bond-holders to restructure if the market turned worse and mid-caps found refinancing tough. They (bond-holders ) are seasoned risk investors by nature and they would not precipitate a major default scare, he said. But the recent events involving Wockhardt, which defaulted on FCCB repayments in 2009 and the bond-holders led by hedge fund QVT has not been pretty with both of them entangled in a legal process now.
The bond-holders, who offered to sell at deep discount in the distress period of 2008-09, are not doing the same any longer. There has been a churn among the FCCB industry with some large hedge funds buying out struggling bond-holders in recent past. And one would suspect that they are hoping for some strategic playlike Sun Pharma acquiring Wockhardt bondsin case of a problem, said a bond market observer.
At least a few companies facing the FCCB pressure also have a strained balance sheet with high debt and sluggish profit, and additional debt burden at higher interest rates would be threatening to wipe out their net profits.
The head of a finance company has an interesting take on companies whose stocks are deep out of the money, meaning the current market price of the stock is far below the conversion price. The promoters of Indian companies, which are almost sure they wont have to go back to foreign fund managers, usually default on FCCBs. And Indian laws are such that it becomes futile for bond-holders to take these promoters and companies to task, he said.
One such example is Pyramid Saim! ira. In 2007, the company had raised $90 million through an FCCB issue, but since the company has gone into liquidation, the FCCB holders have almost no recourse to get their money back.
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