Consensus reached on Karuturi FCCBs

The consortium of foreign currency convertible bond (FCCB) holders led by Goldman Sachs has reached an agreement with Bangalore-based floriculture major Karuturi Global for restructuring these. The holders have agreed to restructure FCCBs worth $39 million, through a written resolution involving extension of maturity of existing FCCBs, part redemption of FCCBs and part refinance by cashless exchange of these FCCBs for new ones, subject to the Reserve Bank of India's approval.

As part of the restructuring, Goldman Sachs might convert part of its holdings into equity over a period. While the management of Karuturi confirmed the restructuring, it, along with Goldman Sachs, didn't comment on the planned move to convert bonds into equity. Today, the Karuturi Global stock closed at Rs 3.15 on the National Stock Exchange, a rise of 6.8 per cent over the previous close.

In late 2007, Karuturi Global had issued $50 million of FCCBs. This was aimed at raising funds for acquisitions in Kenya. These bonds were due in October 2012. The company had approached the bondholders with a restructuring proposal, hoping its fledgling agriculture business would start generating cash. However, with quarterly revenues of only about $5 million, the company couldn't meet the deadline.

Analysts and investors are concerned about the drastic drop in promoter shareholding in the company, which fell about half in the past quarter. The promoters, who held about 18 per cent at the end of the quarter ended September, now hold about 10 per cent, as lenders aggressively invoked pledges. The company, which has under lease expansive tracts spanning about 300,000 hectares, has been at the centre of a controversy over alleged land grabbing.

In the recent past, Icra had flagged concerns, stating there were risks associated with the foray into agriculture.

The risks included execution and logistical ones, which could be compounded by adverse climatic changes, resulting in lower-than-expected yields of agricultural and floricultural products.

In late 2011, Karuturi had taken a $15-million hit due to floods in the region, even as it embarked on an ambitious $300-million agriculture foray.

Against the planned capital expenditure of $209 million (Rs 1,150 crore) for cereal production across 80,000 hectares (according to Icra estimates), the company has already incurred capital expenditure of about Rs 1,000 crore. "So far, the company has bought equipment worth about $50 million and built 120 km of drainage, 120 km of dykes and about 50 km of canals. However, adequate returns on the significant capital investments by the company aren't expected in the near to medium term. This of due to the company's moderated development/cultivation plan after the losses incurred due to flash floods in the second half of FY12," Icra noted. It added there were concerns over materialisation of significant contingent liabilities against income tax and transfer pricing disputes.