India Inc takes swap route to beat FCCB redemption blues

India Inc takes swap route to beat FCCB redemption blues
Abhineet Kumar / Mumbai November 21, 2009, 0:43 IST

Indian companies have discovered a new path to beat the redemption pressure on their Foreign Currency Convertible Bonds (FCCBs). They are swapping the old FCCBs, which had high conversion premium, with new bonds at a much lower rate.
FCCBs worth $12.7 billion, issued by 185 companies during the bull run of 2004-2007, are due for maturity in the next three years. The stock prices of 138 of these companies are currently below their fixed conversion price.
Early this week, India’s largest steelmaker Tata Steel concluded what merchant bankers call an exchange scheme for $875 million FCCBs due for maturity in 2012. The company got 56 per cent acceptance to its exchange offer, as $493 million of the old FCCBs were exchanged with new ones worth $546 million due to mature in 2014.

EXCHANGE OFFER

Company Announcement FCCB Exchange
Suzlon 21-Jul $93.8 million
Amtek Auto 11-Sep $65 million
Subex Azure* 3-Nov $98.7 million
Tata Steel 20-Nov $546 million
* Approved by the board

Suzlon and Amtek Auto also took this route in the recent past. Both exchanged their old FCCBs with new ones worth $160 million. Subex Azure has taken board approval for exchange of $98.7 million FCCBs. Experts said more companies will take this route.
FCCB is a hybrid instrument that enables a buyer to convert bonds into equity before maturity at a predetermined price. With share prices crashing much below the conversion price, companies came under redemption pressure. This prompted the Reserve Bank of India to open the window for buyback of FCCBs in December last year.
In all, 33 Indian companies bought back bonds worth $643 million using the special window. The companies raised fresh funds or dipped into reserves to use the opportunity of buyback as the converts were available at a discount. The window is going to be closed next month.
“During the height of the credit crisis, convertibles as an asset class were oversold by holders as many of them went into distress. So, FCCBs were selling at a discount,” said
S Ramesh, chief operating officer, Kotak Mahindra Capital Company, a leading domestic investment bank. “Since then, the global credit markets and the general investor situation have improved, leading to a recovery in the convertible bond prices and the consequent reduction of the discount levels,” he said.
Kotak has a collaboration with KBC Financial Products, a market leader in convertible bonds with a global presence. Tanushree Bagrodia, director, KBC Financial Products, said, “While earlier it was mainly companies under stress who were looking to exchange their FCCBs, today more companies are proactively looking to exchange their old convertible bonds with new ones and take advantage of better coupon and conversion rates besides extended tenor.” Investors too prefer this proactive approach as there is a good possibility of the bonds getting converted into equity.
Tata Steel, whose exchange offer for the FCCB got over on Friday, was able to issue new FCCBs at a premium of 15 per cent over the current market price. The new bonds have a coupon of 4.5 per cent. “The lower conversion premium makes the exchange bonds more equity-like, which is in line with the company’s overall deleveraging strategy,” said Koushik Chatterjee, group chief financial officer, Tata Steel.
But the other three companies had to make the exchange offers in distress as their conversion prices were lower than the prevailing stock price, market players said.

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