Redemption pressures and a sharp fall in share prices have turned overseas institutional investors and hedge funds into distress sellers of foreign currency convertible bonds (FCCBs) issued by Indian companies.
These hybrid instruments, which are listed on some European stock exchanges and the Singapore Stock Exchange, are being traded at such huge discounts that their yields are as high as 30 to 50 per cent . Yields move in inverse ratio to market price.
Yield-to-maturity of some leading FCCBs
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|Note: YTM moves inversely to market price|
“FCCBs holders are selling these instruments in the secondary market to make an early exit,” said the chief executive of a leading hedge fund.
Overseas investors want to exit early because the price at which these bonds will be converted into shares — a process than begins from 2009 onwards for most companies — far exceeds the current share price of the companies that issued them.
According to a CLSA report, 130 companies have raised around $20 billion through FCCBs over the last five years.
Most bond-holders anticipate that share prices are unlikely to recover at the time of conversion. With few buyers, however, these instruments are almost illiquid. As a result, a leading foreign investment banker said companies are offering discounts as high as 40 to 50 per cent to offload these instruments now.
For instance, Wockhardt’s $110 million FCCB, which will mature in October 2009, is trading at a yield to maturity (YTM) of 40 per cent.
Against the conversion price of Rs 486, the Wockhardt stock is trading at around Rs 110 on the domestic bourses. The stock needs to appreciate more than four times in the next one year to reach the conversion price.
Wockhardt Chief Financial Officer Rajiv Gandhi, however, said the conversion price is still 12 months away and no one can predict the market.
“If the bond-holders opt for redemption, the company will raise fresh equity,” he said. The company already has shareholder approval to raise equity worth $200 million (Rs 1,000 crore).
To redeem the bonds, the company needs to pay back $140 million or Rs 700 crore at current prices. Since the company’s market capitalisation is Rs 1,200 crore, mopping up such a large amount would significantly dilute promoters’ holdings.
Many more companies will find themselves facing huge fund requirements if the bond-holders choose to redeem their bonds rather than opt for shares.
For instance, FirstSource raised $275 million in November 2007 slated for conversion at Rs 92 in 2012. The current price is Rs 15 per share.
If the bond-holders request redemption, FirstSource will have to pay $386 million or around Rs 1,900 crore. Its current market capitalisation is Rs 632 crore.
“2012 is far away,” said Carl Saldanha, chief financial officer of FirstSource.
Impending FCCBs redemption pressure has, however, adversely affected FirstSource’s divestment exercise, said a banker close to the development.
Ranbaxy recently reduced the conversion price of its $440 million (Rs 2,500 crore) FCCB to Rs 555 a share from Rs 716 after consulting bond-holders and the Reserve Bank. Now even this lower conversion price is unlikely to be reached since the market price has dropped below Rs 170.