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1/21/13
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Feature / Economy
MAGAZINE | MAY 16, 2009
Hope Floats
Indian fi rms have got an unexpected chance to defuse the FCCB time bomb.
T V MAHALINGAM
F
or a while, It seemed that forein currency convertible bonds, or FCCBs, once a popular instrument to raise easy money, would turn
out to be a millstone around the necks of companies that had indulged themselves on these. But the recent misfortune of hedge funds, the primary class of investors in FCCBs, may just turn the entire grim situation to the advantage of Indian FCCB issuers like Tata M otors, Tata Steel, Bharat Forge and Suzlon Energy. In the aft ermath of the global fi nancial turmoil, hedge funds are facing intense redemption pressure. They are showing a willingness to sell back these FCCBs at steep discounts—anywhere from 25-50% of the book value, depending on the desperation of their redemption situation. That could turn out to be a blessing for Indian companies in two ways. First, if they can raise internal accruals or alternate funding, companies can buy back FCCBs and pare their debt to the extent of the discount that’s available. Second, the profit they make when they buy back FCCBs could be booked as extraordinary income, and could give the earnings of these companies an unexpected fi llip. “When we are buying back the bonds, we will account for the discount as extraordinary income,” says a senior offi cial in one of the companies that has recently aff ected a FCCB buyback.
Since March 13, Mumbai-based BPO firm Firstsource Solutions has been on a hectic FCCB buyback spree. The company had raised $275 million through an FCCB issue last year to repay the debt that it had taken on to finance its acquisition of US-based healthcare services company MedAssist. So far, it has bought back bonds worth $49.7 million (face value) at an undisclosed discount. “We were able to arrange financing (it has made an undisclosed external commercial borrowing) and so we decided to take advantage of the available discount. It improves the company’s balance sheet and it should improve the valuation,” says Firstsource CEO Ananda Mukerji. Incidentally, Firstsource’s FCCBs don’t come up for redemption before December 2012. But given the fact that its current share price of Rs 17 is an 87% discount to the conversion price of Rs 128.6, the bonds now look like an uncomfortable liability on its books. So, buybacks at steep discounts are a relief.
Facing redemption pressure, hedge funds, the primary class of investors in FCCBs, are willing to sell back their bonds at a 2550% discount. Companies with money on hand are buying back.
Several companies could gain from such discounted FCCB buybacks. Since 2003-04, Indian companies have raised FCCBs worth $20 billion, says broking and research firm CLSA. While some of the issuances are due for redemption within the next 12 months, most are due by 2011-12. Among those who are facing the music is Mumbai-based Wockhardt. Credit rating agency Fitch noted in a March 2009 rating report: “The refinancing of its $140 million (including interest on maturity) FCCB due in September 2009 remains a key concern.” Th e company is struggling with a Rs 3,000plus crore debt burden, which it had raised to fi nance acquisitions, and has approached the corporate debt restructuring (CDR) cell of ICICI Bank for restructuring ofits debt.
Unlike Wockhardt, several others, like Firstsource, still have the option of reducing their liabilities through the buyback route. Th e question is: do they have the money to fi nance those buybacks? So far, most of the buybacks that have been announced—Firstsource is an exception—have been fi nanced through internal accruals (See table: Using Th e Buyback Window). Between December 2008 and April 15, 2009, the RBI approved 18 proposals for FCCB buybacks amounting to $765 million. All of these were fi nanced through internal accruals. Rush For Buybacks
For a while, it seemed that FCCBs could have been the undoing of many companies. These cheap funds, raised just two years ago at zero eff ective cost, are now backfiring on borrowers. Because of the stockmarket crash, most of the bonds
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1/21/13
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are now out of money. With the markets trading 50% below their peak, shares of most companies are trading 50-75% below their conversion price. Tata Motors’ current share price, at Rs 252, trades 74% below the conversion price of Rs 961 for both its FCCB issuances due in February 2011 and June 2012, respectively. “Th e conversions just don’t seem diffi cult, they seem impossible,” says a Mumbai-based investment banker, on condition of anonymity. The only way, therefore, for companies to reduce some of the burden of their liabilities is to buy back a portion of the bonds, if they can find the money.
To make it easier for companies to buy back, the RBI, in its recent monetary policy, has further liberalised the norms for buyback via the approval route. Th e earlier $50 million cap has been increased to $100 million by linking the higher amounts of buyback to larger discounts. So, companies can buy back FCCBs up to $50 million at a minimum discount of 25% on book value. Above $50 million and up to $75 million, the discount would be 35%; and above $75 million and up to $ 100 million, it would be 50%. Th e central bank has also extended the cut-off date for the completion of the entire procedure of buybacks from March 31 to December 31, 2009.
Companies are likely to face two problems if they choose to avoid acting now and wait for their FCCBs to mature. One, the equity markets need to swing up by over 50-100% from current levels for it to make sense for FCCB investors to exercise the conversion option and get equity shares in return for bonds. That is very unlikely.
Two, if a company’s share price continues to trade below its conversion price, its FCCB investors have the choice to redeem bonds. The companies would then have to retire debt as principal plus interest, calculated at a pre-decided rate. Also, a few companies have not been providing for interest liability on FCCBs; most have been living with the presumption of conversion into equity. If the bonds are redeemed (not converted into equity), companies have to show the interest for the entire tenure of the bond on its profi t and loss account at one go. That will lead to an earnings shock. “This could lead to a big hit in the income statement if these come up for redemption,” Shrenik Baid, Executive Director-Global Capital Markets Group, PricewaterhouseCoopers, had told Outlook Business in November 2008. Discounted buybacks seem to be the best bet. However, given the tight credit environment, it will be diffi cult for most companies, especially those in the mid-sized segment, to raise bank loans or even muster up internal accruals to take advantage of the RBI’s policy. One source of capital, though, could be private equity, says Sidharth Punshi, Managing Director and Country Head, Jeff eries India, a Mumbai-based investment bank. “A lot of PE fi rms are very interested in FCCB restructuring deals. For one, it would allow them to buy more equity in existing portfolio companies (and average out the high prices they had originally invested at),” he says. It may mean promoters giving away more control than they like to, but given the current situation, they may have little choice.
With inputs from Snigdha Sengupta Click here to see the article in its standard web format
business.outlookindia.com/printarticle.aspx?102109
2/2
business.outlookindia.com |
Feature / Economy
MAGAZINE | MAY 16, 2009
Hope Floats
Indian fi rms have got an unexpected chance to defuse the FCCB time bomb.
T V MAHALINGAM
F
or a while, It seemed that forein currency convertible bonds, or FCCBs, once a popular instrument to raise easy money, would turn
out to be a millstone around the necks of companies that had indulged themselves on these. But the recent misfortune of hedge funds, the primary class of investors in FCCBs, may just turn the entire grim situation to the advantage of Indian FCCB issuers like Tata M otors, Tata Steel, Bharat Forge and Suzlon Energy. In the aft ermath of the global fi nancial turmoil, hedge funds are facing intense redemption pressure. They are showing a willingness to sell back these FCCBs at steep discounts—anywhere from 25-50% of the book value, depending on the desperation of their redemption situation. That could turn out to be a blessing for Indian companies in two ways. First, if they can raise internal accruals or alternate funding, companies can buy back FCCBs and pare their debt to the extent of the discount that’s available. Second, the profit they make when they buy back FCCBs could be booked as extraordinary income, and could give the earnings of these companies an unexpected fi llip. “When we are buying back the bonds, we will account for the discount as extraordinary income,” says a senior offi cial in one of the companies that has recently aff ected a FCCB buyback.
Since March 13, Mumbai-based BPO firm Firstsource Solutions has been on a hectic FCCB buyback spree. The company had raised $275 million through an FCCB issue last year to repay the debt that it had taken on to finance its acquisition of US-based healthcare services company MedAssist. So far, it has bought back bonds worth $49.7 million (face value) at an undisclosed discount. “We were able to arrange financing (it has made an undisclosed external commercial borrowing) and so we decided to take advantage of the available discount. It improves the company’s balance sheet and it should improve the valuation,” says Firstsource CEO Ananda Mukerji. Incidentally, Firstsource’s FCCBs don’t come up for redemption before December 2012. But given the fact that its current share price of Rs 17 is an 87% discount to the conversion price of Rs 128.6, the bonds now look like an uncomfortable liability on its books. So, buybacks at steep discounts are a relief.
Facing redemption pressure, hedge funds, the primary class of investors in FCCBs, are willing to sell back their bonds at a 2550% discount. Companies with money on hand are buying back.
Several companies could gain from such discounted FCCB buybacks. Since 2003-04, Indian companies have raised FCCBs worth $20 billion, says broking and research firm CLSA. While some of the issuances are due for redemption within the next 12 months, most are due by 2011-12. Among those who are facing the music is Mumbai-based Wockhardt. Credit rating agency Fitch noted in a March 2009 rating report: “The refinancing of its $140 million (including interest on maturity) FCCB due in September 2009 remains a key concern.” Th e company is struggling with a Rs 3,000plus crore debt burden, which it had raised to fi nance acquisitions, and has approached the corporate debt restructuring (CDR) cell of ICICI Bank for restructuring ofits debt.
Unlike Wockhardt, several others, like Firstsource, still have the option of reducing their liabilities through the buyback route. Th e question is: do they have the money to fi nance those buybacks? So far, most of the buybacks that have been announced—Firstsource is an exception—have been fi nanced through internal accruals (See table: Using Th e Buyback Window). Between December 2008 and April 15, 2009, the RBI approved 18 proposals for FCCB buybacks amounting to $765 million. All of these were fi nanced through internal accruals. Rush For Buybacks
For a while, it seemed that FCCBs could have been the undoing of many companies. These cheap funds, raised just two years ago at zero eff ective cost, are now backfiring on borrowers. Because of the stockmarket crash, most of the bonds
business.outlookindia.com/printarticle.aspx?102109 1/2
1/21/13
business.outlookindia.com |
are now out of money. With the markets trading 50% below their peak, shares of most companies are trading 50-75% below their conversion price. Tata Motors’ current share price, at Rs 252, trades 74% below the conversion price of Rs 961 for both its FCCB issuances due in February 2011 and June 2012, respectively. “Th e conversions just don’t seem diffi cult, they seem impossible,” says a Mumbai-based investment banker, on condition of anonymity. The only way, therefore, for companies to reduce some of the burden of their liabilities is to buy back a portion of the bonds, if they can find the money.
To make it easier for companies to buy back, the RBI, in its recent monetary policy, has further liberalised the norms for buyback via the approval route. Th e earlier $50 million cap has been increased to $100 million by linking the higher amounts of buyback to larger discounts. So, companies can buy back FCCBs up to $50 million at a minimum discount of 25% on book value. Above $50 million and up to $75 million, the discount would be 35%; and above $75 million and up to $ 100 million, it would be 50%. Th e central bank has also extended the cut-off date for the completion of the entire procedure of buybacks from March 31 to December 31, 2009.
Companies are likely to face two problems if they choose to avoid acting now and wait for their FCCBs to mature. One, the equity markets need to swing up by over 50-100% from current levels for it to make sense for FCCB investors to exercise the conversion option and get equity shares in return for bonds. That is very unlikely.
Two, if a company’s share price continues to trade below its conversion price, its FCCB investors have the choice to redeem bonds. The companies would then have to retire debt as principal plus interest, calculated at a pre-decided rate. Also, a few companies have not been providing for interest liability on FCCBs; most have been living with the presumption of conversion into equity. If the bonds are redeemed (not converted into equity), companies have to show the interest for the entire tenure of the bond on its profi t and loss account at one go. That will lead to an earnings shock. “This could lead to a big hit in the income statement if these come up for redemption,” Shrenik Baid, Executive Director-Global Capital Markets Group, PricewaterhouseCoopers, had told Outlook Business in November 2008. Discounted buybacks seem to be the best bet. However, given the tight credit environment, it will be diffi cult for most companies, especially those in the mid-sized segment, to raise bank loans or even muster up internal accruals to take advantage of the RBI’s policy. One source of capital, though, could be private equity, says Sidharth Punshi, Managing Director and Country Head, Jeff eries India, a Mumbai-based investment bank. “A lot of PE fi rms are very interested in FCCB restructuring deals. For one, it would allow them to buy more equity in existing portfolio companies (and average out the high prices they had originally invested at),” he says. It may mean promoters giving away more control than they like to, but given the current situation, they may have little choice.
With inputs from Snigdha Sengupta Click here to see the article in its standard web format
business.outlookindia.com/printarticle.aspx?102109
2/2
