Companies should be ready to redeem FCCBs: Crisil report

Rating agency Crisil on Monday said listed companies which raised money through foreign currency convertible bonds (FCCBs) should be ready to redeem such bonds, instead of expecting investors to convert these into shares, since FCCBs are trailing below their conversion price.

FCCBs worth Rs 31,500 crore ($7 billion) are due for redemption over the next two years for S&P CNX 500 companies. About 80 per cent of FCCBs were trailing below their conversion price as on May 3. “This would result in investors opting to redeem their bonds, rather than converting them into equity shares,” Crisil said in a statement.

In many cases, the redemption amount is high, and companies do not have adequate funds for the repayments. This would force companies with FCCBs worth Rs 22,000-24,000 crore to either refinance the bonds or revise their conversion price downwards, which would dilute the stake of current shareholders. However, both would adversely affect company financials. Companies with outstanding FCCBs of Rs 1,500-2,000 crore, high debt and low stakes of promoters would face challenges in meeting repayment obligations, the rating agency said.

When business sentiment was high, both investors and issuers benefited from FCCBs. Companies gained due to lower interest rates, since these bonds carried very low coupon rates, compared to average lending rates. However, the global economic slowdown resulted in the share prices of several companies falling below the conversion price (the price at which FCCBs can be converted into equity shares) of their FCCBs. Equity markets have recovered significantly since then, but the stock prices of many issuers continue to be below their 2008 highs.