FCCB refinancing: Banks rush for dollar bonds

These FCCBs issued by major corporates are under pressure for redemption as their stocks are trading below their equity price

Indian banks’ rush for overseas dollar denominated bonds that saw over $3.5 billion (Rs 19,440 crore) being raised in about a month may come as a relief for corporates which are looking for refinancing $2.5 billion foreign currency convertible bonds (FCCBs) maturing this year.

These FCCBs issued by corporates such as Tata Steel, Jaiprakash Associates, GTL Infrastructure and Suzlon Energy have come under pressure for redemption as their stocks are trading below the price these bonds were supposed to be converted into equity. This has led to bond holders looking for redemption.

India's largest bank State Bank of India (SBI) raised $1.2 billion in the overseas dollar denominated bond sale on 27 July. The bank's five-year medium-term notes were priced 375 basis points above the benchmark US treasury bills and this way it carried a coupon of 4.125 per cent. The issue got oversubscribed by 5.2 times and yet it was the cheapest ever by an Indian bank. This was SBI's return to the foreign bond market after two years, last it raised was $1 billion in July 2010.

Also in April global rating agency Standard and Poor’s cut India's sovereign outlook to negative and that had made some bankers wary of investor response. But the strong response by investors to SBI's issue turned around the demand for raising fund through foreign bonds.

Following SBI's issue, ICICI Bank and Axis Bank raised $750 million and $250 million, respectively, at coupon rate of 4.7 and 5.125 per cent. Indian Overseas Bank, Union Bank of India and Exim Bank are other banks that have taken the total fund raising through this route to above $3.6 billion in about a month's time. Additionally, IDBI Bank has also raised 250 million Singapore dollars ($200 million) through foreign bond issue.

“Our liability gathering is asset led,” said Diwakar Gupta, chief financial officer at SBI. “Part of the money raised by us can be used for refinancing the Indian corporates’ FCCBs that are coming for redemption.”

K Anil Kumar, head of the global financial institutional division at Axis Bank, also confirmed the part utilisation of these funds for refinancing the FCCBs.

Such funds raised by the overseas branches of Indian banks cannot be brought back to India as the Reserve Bank of India discourages such moves. Banks use these fund for lending to Indian corporates’ overseas operations. FCCB refinancing looks to be the most urgent requirement as the companies refrain from expansion amid the global slowdown.

“The foreign bond issuance by these banks will certainly give them some more comfort and flexibility for refinancing the FCCBs,” said D Saradhi Rajan, managing director, debt capital markets at Bank of America Merrill Lynch, which has been one of the lead managers for most of these issues.