How FCCBs can change fortunes

Maturity dates of FCCBs and the possibility of their non-conversion into stocks are elements that analysts and investors have started tracking closely. FCCBs look irresistible and a cheap source of finance in a bull market. But when chips are down, a non-conversion can reverse the fortunes of a company and alter its debt-equity ratio. In order to avert defaults and protect their reputation and rating, companies raise fresh loans to pay back FCCB investors.

WHAT ARE FCCBs?

Foreign currency convertible bond, or FCCB, is essentially a bond that allows a buyer to convert bonds into equity before maturity at a market-linked pre-determined price.

HOW CAN THEY AFFECT COMPANIES?

Tepid equity may result in non-conversion as the stock does not reach the conversion price.

As a result, the issuer has to pay back the money like a loan.

This can be a severe jolt to the companies which never factored in the possibility of non-conversion.

Unitech, BGR, Suzlon, Punj Lloyd, GMR, HDIL have low debt serviceability.

FCCB non-conversion could increase the debt-equity ratio for Suzlon, Sintex, Rolta, RCom.

DEBT OVERHANG

Balance sheets have improved since the 2008-09 slowdown as companies have raised equity to pay back debt and slowed capex plans.

However, indebtedness of many individual companies, particularly in the infrastructure sector, has increased.

In the cases of BGR Energy, Dish TV, Adani Power and GMR Infra, the increase in the net debt-to-equity ratio has been substantial.