FCCB redemption may open PE investment route

$1.3-bn convertible bonds are due to be redeemed this year

Indian private equity (PE) players, unable to find right deals in the current economic environment and sitting on a cash pile, are finding a new way to tap the market— foreign currency convertible bond (FCCB) redemption.

Education service provider Educomp Solutions Ltd’s recent move to raise a fresh round of funding from its PE investors to repay its FCCB dues is a case in point. Educomp has raised $155 million from existing investors such as IFC and Mount Kellett.

As several other companies are looking to raise funds to redeem their FCCBs, such a move opens opportunities for PE funds to strengthen their grip over listed portfolio firms.

FCCBs are a type of bonds that can be converted into equity at maturity. If the share price of the issuer has fallen since, the investor could ask for redemption of the bonds in cash.

“PE firms were comfortable with the fundamentals of the business and so were happy to invest to enable the company to reduce its debt burden,” said Vikram Utamsingh, head-private equity, KPMG India.

FCCB redemption has become a big issue for several Indian companies, as the rupee has devalued heavily, making redemption much larger than expected.

Also, many companies are over-leveraged and have a tough time getting these loans refinanced at reasonable rates in on Wednesday’s high-rate environment, say experts.

FCCBs worth $1.3 billion are due this year from PE-backed listed companies, according to VCCedge that tracks PE and venture capital activity.

“PE investors usually have a long-term view of businesses and we hope to have a long-term partnership with them as investors,” said Shantanu Prakash, chief executive officer of Educomp. He is not concerned about diluting further stake to PEs as part of FCCB redemption. “We do not have any concern on further dilution.”

Educomp had issued shares to IFC, which are convertible into equity at a 40 per cent premium to floor price and preferential allotment of shares to IFC, Proparco and Mount Kellett, which will be at Rs 149.16 a share, a 10 per cent premium to the floor price.

TOP PE-BACKED COMPANIES WHOSE FCCB REDEMPTIONS ARE DUE
Company	Amount (in $million)		Current investors
	Issued	Outstanding
Strides Arcolab	100.00	80.00	Indiaman Fund*, Passport India Investments*
Pyramid Saimira	90.00	90.00	Brand Capital
Suzlon Energy	300.00	211.30	GIC, IDFC PE Fund III, Citi Venture Capital
Suzlon Energy	200.00	121.37	GIC, IDFC PE Fund III, Citi Venture Capital
Tulip IT Services	150.00	97.00	Bessemer Venture Partners India,GEM India Advisors
Firstsource	275.00	172.30	ICICI Venture, Temasek Holdings Advisors, Sequoia Capital
Great Offshore	42.00	40.00	Carlyle Asia Growth Partners III
*Mauritius-based fund; Source: VCCedge, Bloomberg

Satish Mandhana, managing partner, IDFC Private Equity, said: “PE players funding companies to meet their FCCB obligations cannot be a general phenomenon and the primary driver for any PE remains the value creation capability of infused funding. FCCB redemption uses can be an incidental factor, which helps in removing the debt overhang on the company.”

Added Utamsingh of KPMG India: “We can expect some more such transactions, but these will only happen provided the basic fundamentals of the underlying businesses are strong.”

Suzlon Energy, backed by GIC Special Investment and Citi Venture Capital, has FCCBs worth $389 million due for this year. “Investing in an FCCB is mostly a fixed income game as the options to buy stock are very out of the money, so essentially you are buying a high-yield bond,” say Sumir Chadha of Westbridge Capital.

Other PE-backed majors whose FCCBs are due for this year include Pyramid Saimira Theatre Ltd ($90 million), Subex Ltd ($93 mn), Carlyle-backed Great Offshore Ltd ($40 mn) and Firstsource Solutions Ltd ($172 mn).