Soaring Sensex brings little cheer to FCCB issuers

Although equity markets are around 32-month highs, issuers of foreign currency convertible bonds (FCCBs) have little to cheer about.

According to investment bankers, for most issuers, the market price of shares is still below the conversion price, or the minimum price at which a bond holder is allowed to convert FCCBs into equity.

Even in cases where the market price is above the conversion price, investors are holding out in the hope that the shares will rise further.

An FCCB is a convertible bond issued in a foreign currency which allows holders to convert these into equity. The conversion can happen only if the stock of the issuer is higher than the conversion price, which is pre-determined. If the market price doesn’t reach the conversion price over the tenure of the FCCB, the instrument works like a bond and the issuer has to redeem the amount.

LIMITED CONVERSION
“Although the stock market has gone up, not all stocks have gone back to their 2006-07 levels or well past their conversion prices. Only a select few have seen conversion and the phenomenon is not widespread,” said Nishikant Das, director of debt capital markets at Standard Chartered Bank.

Reliance Communications’ $1-billion FCCB issue is due for maturity on March 1, 2012. The conversion price is Rs 661.23, while RCom’s share closed at Rs 172.25 on the Bombay Stock Exchange. There has been no conversion, according to data from Bloomberg.

Conversion volumes, though, have picked up from last year. But FCCBs of only a few issuers are being converted and the volumes are insignificant compared to the total amount outstanding.

This financial year, FCCBs worth Rs 6,600 crore have been converted into equity so far, according to data collated by BS Research Bureau. FCCBs by Adani Enterprises, Sesa Goa and HDFC have seen the bulk of conversions – for Rs 1,291 crore, Rs 996.95 crore and Rs 369 crore, respectively.

In April this year, Tata Motors converted Rs 1,700 crore worth of FCCBs into shares by offering bond holders a reduced conversion price for a window of five days. FCCBs worth Rs 2,800 crore were converted into equity in 2009-10, up from Rs 1,800 crore in 2008-09.
 

HOLDING ON
Companies	Conversion price (in Rs)	Current price (in Rs)*	Tranche size (in $mn)	Current outstanding  (in $mn)	Maturity date
Reliance Comm	661.23	172.25	1,000	1,000	1-Mar-12
FirstSource	92.29	28.75	275	212.4	4-Dec-12
GTL Infra	53.04	45	35.59	35.57	29-Nov-12
*Closing price on October 1                                                                                                          Source: Bloomberg

According to an earlier study by Edelweiss Securities, 90 companies in the BSE 500 had outstanding FCCBs aggregating Rs 54,610 crore. Unless converted earlier, these will lead to an outflow of Rs 65,200 crore.

OVERHANG & IMPACT
This has had an impact on recent issues. There have been few fresh issuances since April, since investors are insisting on much more stringent conditions such as lower conversion premiums and periodic interest payments, instead of a zero-coupon structure.“As far as the market rally is concerned, I don’t think a lot of the stocks which had conversion price issues have reached the conversion price,” said Hitendra Dave, managing director and head of global markets at HSBC.

“There has been no relief in the debt overhang, The stocks which have crossed the conversion price did not have debt or conversion price issues in any case, whereas stocks which have issues have not reached the conversion price yet,” said a senior executive of a foreign bank.

Even in cases where the current market price is higher than the conversion price, bond holders are choosing to hold on in the hope that prices will rise further. “Most FCCB holders are not equity investors who like to hold shares for a long time. FCCB holders typically convert into equity and sell over a short period of time,” said Stanchart’s Das.

For instance, auto major Mahindra & Mahindra issued FCCBs worth $200 million in 2006 and set the conversion price at Rs 461. Although the company’s current share price is Rs 698, as many as $196 million FCCBs are still outstanding.