FCCB redemption may be smooth for India Inc this year

The first round of redemption of foreign currency convertible bonds (FCCBs) is progressing smoothly for India Inc, despite the volatility in global markets. At least 15 companies have paid investors around $2 billion during the first half of 2011.

Currently, there are 135 FCCB issues worth $10.60 billion outstanding. Of these, 45 issues amounting to $3.32 billion are set to mature over the next one year.

Some major FCCBs to mature are issued by Reliance Communications (outstanding $972 million), Reliance Natural ($300 million), Suzlon ($211 million), Subex ($180 million) and Financial Technologies ($90.50 million). Among SMEs, the redemption pressure will be seen on Paramount Communication, Country Club, KLG Systel, Moser Baer, Prithvi Info and Hotel Lila Venture. However, Bharat Forge, ICSA, Kamat Hotels and Pokarna are well placed to redeem their outstanding FCCBs at a premium.

FCCB holders of Wockhardt, too, are awaiting repayment. Similarly, Aftek, Cranes Software, JCT, Marksans Pharma, Mascon Global, Gremach and Pyramid Saimira have failed on either full repayment or coupon payment.

As most of these issues are out of money, i.e. the conversion price is lower than the current share price, in case of non-conversion of these FCCBs, the total cash outlay would amount to about $4.5 billion. However, according to Prashant Sawant, analyst at KNG Securities LLP, foreign investors have become much more cautious about investing in these instruments due to failure of repayment by a few companies on maturity.

The Reserve Bank of India’s guidelines in terms of repurchase and/or restructuring of outstanding FCCBs, according to Sawant, make existing bondholders helpless, as they are stuck with bonds, where if the company fails to redeem and the Indian high court does not give any respite too. The fact that the RBI has refused to change the conversion price while restructuring the bonds, has upset both investors and companies.

Nevertheless, there are a few companies that are issuing fresh bonds and using the proceeds to pay existing bondholders. Videocon Industries raised $200 million in December 2010 to part finance its expansion and also clear dues to existing bond holders.

The commitment shown by Indian companies by redeeming outstanding FCCBs at a premium in 2010 suggests there would not be many defaulters this year. Recently, Firstsource Solutions announced that it managed to raise $180 million term loans and that it should be able take care of part of its FCCB repayment next year.

The companies that redeemed outstanding FCCBs in 2010 and in the first six months of this calendar year included Amtek Auto, Aurobindo Pharma, Jubilant Life Science, Reliance Communication.