FCCBs shine on equity surge

Foreign currency convertible bonds (FCCBs) are the flavour of the market as corporates are setting their borrowing priorities right.

According to bankers, the domestic market is still being used for raising short-term working capital loans, but overseas market is the favourite route for long-term money.

A well-capitalised, slow growing company with either no option or no requirement to dilute equity is favouring external commercial borrowings (ECBs) for raising loans.

But for the rapidly growing companies aiming at wider investor base, FCCBs are the obvious choice. Bankers said Tata Motors is understood to be contemplating an ECB issue of $50-100 million and also a second tranche of FCCB loans.

They added that the loan will be raised by the proposed Korea-based wholly-owned subsidiary of Tata Motors "" which will handle Daewoo Motors' Korean operations "" with the guarantee of the Indian outfit.

BSES is also in negotiations with bankers for bids to go for overseas borrowing. However, it is not known whether it will be ECB or FCCB.

Bankers said FCCBs are in vogue on the back of the stock market boom. This is because the strike price at which the in-built equity conversion will be priced is pegged to the ruling stock price.

Moreover, as the instrument has an equity conversion built into it, the coupon on the bonds works out much cheaper than plain ECB.

The coupon on ECBs is a spread over the ruling benchmark of London inter-bank offer rate (Libor) which is a floating rate. FCCBs, in contrast, carry a fixed coupon.

Besides, there are various swaps which could be factored into the FCCB that allows both the borrower and the lenders to hedge currency risks.

Another major advantage of FCCB is its liquidity as it can be traded in the secondary market among a range of investors such as foreign institutional investors and overseas corporate bodies (OCBs), which want to stay invested in emerging markets.

Bankers are of the view that even though the government has allowed optional equity conversion in case of ECBs, banks and financial institutions normally do not opt for increasing their equity base - partly because of statutory ceiling in equity investments.

Public sector undertakings find ECBs the most favourable option as they do not dilute equity. While Power Finance Corporation and Indian Railway Finance Corporation have concluded deals worth $100 million and $80 million for five-year funds, GAIL India and Mangalore Refinery are in the process of raising ECBs worth $100 million each.