India Inc converts, loosens FCCB bonds
Foreign currency convertible bonds (FCCB) are losing their sheen. After becoming India Inc’s favourite fund-raising instrument, FCCBs are falling out.
By Gaurie Mishra, TNN |
NEW DELHI: Foreign currency convertible bonds (FCCB) are losing their sheen. After becoming India Inc’s favourite fund-raising instrument, FCCBs are falling out
of favour due to rising interest costs, declining premia and lower conversion into equity. This is dissuading Indian companies from taking the FCCB route as it means that not only will they have to service their debt at higher interest rates but also have higher debt on their books.
“The degrowth witnessed by companies in their top line this year is affecting conversion. The volatility of scrips is also impacting conversion of FCCB issues,” Anand Rathi Securities’ economist Karan Dutt said.
Companies raise money in the international market through FCCBs. The cost of borrowing through this route is rising as the interest rates in the international markets have risen in the past year. Premium commanded by FCCBs — which is the conversion price relative to the market price of a scrip at the point of issue — has also declined.
FCCB issues this year have got a premium of 28.9%, according to data by Anand Rathi Securities. Put in simpler terms, this implies the conversion price of these FCCBs, on an average, has been about 30% higher than the market price of the respective scrip at the time of the FCCB issue. This is however, distinctly lower than the average premium of 44% commanded during October 2004-June 2006.
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Interestingly, even when conversion takes place, the equity dilution is expected to reduce PAT for 2007-08 of FCCB-issuing companies by 19%, according to the latest Anand Rathi Securities report on FCCBs. For instance, both Reliance Communications and 3i Infotech are expected to witness a 3% dip in PAT this fiscal.IT company Financial Technologies is expected to report a 20% fall in PAT this fiscal on account of yield to maturity (YTM). According to the report, the fall in PAT for Orchid Chemicals is expected to be 42%. The drop in PAT is expected to be 2% for Videocon Industries.
“The subprime problem has raised the cost of debt abroad. To compensate the investor and price the debt within the regulatory spread, the premium on equity conversion is being lowered. However, if their share price does not move up and conversion is not triggered, FCCB issuers would have large redemptions on maturity,” ICICI Securities senior V-P Ravi Sardana said.
FCCB is used by a company to raise funds in foreign currency. It is issued in a currency different than the issuer’s domestic currency with an option to convert the FCCBs in common shares of the issuer company. The instrument is similar to bonds as it draws regular interest payments and also gives the holder the option to convert the bond into stock.
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FCCBs carry a YTM rate. YTM has been higher for FCCB issues this year. This, experts say, is due to the general tightness of credit markets globally. The average maturity period for FCCB continues to be around 5 years, which, experts feel, is a reflection of the fact that companies are raising money though this route for funding capex requirements.Download
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