FCCBs return with stronger rupee, rising markets

Indian companies raised only $129 mn raised in 2013 and just $16 mn raised till date in 2014

 

Indian companies are dusting off plans to raise money through foreign currency convertible bonds (FCCBs) as an appreciating rupee and a bullish stock market again make these bonds attractive.

FCCBs had dried up in the past two years with Indian companies raising only $129 million in 2013 through these bonds and just $16 million so far in 2014. This was in sharp contrast to a record $7.6 billion FCCBs raised in 2007.

Construction and engineering giant L&T recently hired bankers to launch a $200 million FCCB issue with a conversion price of Rs 1,916 a share. The FCCBs would be listed on the Singapore stock exchange, L&T said in a statement to stock exchanges.

L&T’s plan comes within two weeks of Sesa Sterlite seeking shareholders’ approval to raise Rs 6,000 crore ($1 billion) through FCCBs and American depository receipts (ADRs).

Bankers said many other companies were looking at raising funds through FCCBs. FCCBs are a product of a bull market and an appreciating currency. “When the equity market is high, FCCBs are the best option to get the maximum conversion premium, best yield-to-maturity and the lowest coupon rate. FCCBs are very attractive as they mix equity with debt and make the debt cheap,” said Prabal Banerjee, president of international finance at the Essar group.

“FCCBs are a good option for those companies that have significant foreign currency earnings or those that treat these bonds as debt and provision in their books as such and hedge the exposure to the extent possible,” said Deep Mukherjee, senior director of India Ratings. “But they are a bad choice for a company that assumes the FCCB will get converted and no provision need be maintained and that does not hedge its exposure,” he added.

FCCBs have gone wrong for companies, including Wockhardt which had to sell assets to pay bondholders. Bond holders sued Indian companies in the last three years to get back their money as the rupee fell against the dollar and the stock market crashed.

“If the rupee depreciates rapidly, the parity price of an FCCB, all other factors being equal, can still be lower than its issue price and in that scenario, the FCCB may not get converted. It becomes a full-fledged debt with a depreciated rupee and the actual liability may be much higher. Unless there is a natural hedge in the company, this can be a recipe for high liability,” Banerjee said.

A second scenario that makes FCCBs dangerous is if the equity market turns around and the conversion window price is lower than the original conversion price fixed. No conversion takes place and the FCCB becomes a clean liability with the yield-to-maturity to be paid out. In this case, the bonds become pure debt and have to be repaid. Refinancing can be a huge outgo, disturbing the balance in the company.

"But for well performing companies with steady state operational cash flow , this is the best time to issue FCCB as it is one of the best sources of cost effective capital, which may not be needed to be returned with marginal dilution of equity. In my opinion, this is a comeback and it is one of the best option for raising capital for an well performing Indian company," said Banerjee.