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Sameer Sohail Sankar Himanshu Arun V M
• Fundamentals • A bitter pill? • Story 1 : Wockhardt • Story 2 : Tata Motors • Parting thought …
ABC of FCCB
• Foreign Currency Convertible Bond (FCCB) - Mix between debt and equity instruments A quasi-debt instrument attractive to both investors and issuers Acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock Investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock
Anatomy of an FCCB…
Capital in $ Issuer of FCCBs FCCBs 29-Apr-2009 29-Apr-2009 raises money in dollars receives FCCBs sets conversion price at premium (say Rs 125) can trade FCCBs if in liquidity crunch maturity period between 3-5 years If markets are good… Issuer of FCCBs FCCBs returned 29-Apr-2014 29-Apr-2014 no need to pay in cash makes windfall profit by selling equity at prevailing market prices (say Rs 200) issues equity at pre decided price (Rs 125) equity dilution If markets are bad… Issuer of FCCBs FCCBs returned 29-Apr-2014 redeem bonds at par value huge requirement of cash buy back from market before maturity if traded at discount 29-Apr-2014 redeem FCCBs at par value principal investment comes back with small returns 5 Equity at conversion price Lender of money Lender of money
Capital in $ Lender of money
A Win-Win proposition ?
FCCBs Capital in $
Benefits for Investors To bring down their exposure in one country by diversifying their portfolio Wanted to invest in emerging markets and India looked good Gives much of the upside of investment in equity If share price goes up, benefits from the capital appreciation Debt element protects the downside Assured of a fixed return and capital protection Benefits for Issuing Companies Easy way to "dollarise" balance sheets Low overseas interest rates Relatively strong rupee against the greenback FCCB does not require any rating, nor any covenant like securities, cover etc Can be raised within a month while pure debt takes longer to raise Low cost means of financing
Cost of withholding tax is lower for as compared to other Investors buy FCCBs not as instruments of debt but ECB instruments for the lure of the equity No need to shell out large sums of money to redeem the debt
The Indian Context
Biggies who played the FCCB game
Name Bajaj Hindusthan Moser Baer Aurobindo Pharma Tata Motors Tata Motors Hind. Construction Wockhardt 3i Infotech Bharat Forge Ranbaxy Maturity Period Feb, 2011 Jun, 2012 May, 2011 Mar, 2011 Jun, 2012 Mar, 2011 Sep, 2009 2012 Apr, 2010 Mar, 2011 Issue Size (Mn) 120 USD 75 USD 150 USD 11760 JPY 450 USD 100 USD 110 USD 100 USD 60 USD 440 USD 500 USD 150 USD Conversi on Price 465 546 1014 1001 961 248 486 462 384 716 476 231 CMP (As on 28 Apr 09) 18.34 65.25 218.15 232.80 232.80 51.70 89.85 44.00 120.25 165.30 207.55 164.75
Reliance May, 2011 communication Tata Chemicals Jan, 2010
A bitter Pill
In today’s financial downturn … • Conversion price of FCCBs has gone several times higher than their current market price • • Investors disinterested in converting their bonds into equity Rupee at low, high INR payment awaiting A bitter pill to swallow for issuing companies … • Search for resources to repay the debt with fresh expensive borrowing • Reset the conversion clause, to bring it closer to reality - Potential dilution of share holdings
Wockhardt’s Big Plans
• Board meeting of Q2, 2004 - Wockhardt launched its maiden FCCB issue of US $ 100 Mn with a Greenshoe option of US $10 Mn 5 year, zero coupon bond with a 50 per cent premium and a yield of 5.25 per cent compounded semi-annually
Purpose: • To expand reach in Europe through the inorganic route –acquired two companies in Europe and established its own sales and marketing organization in the US • Setup of a SEZ in the Shendra Industrial Park near Aurangabad, Maharashtra, which will house the company’s R&D and manufacturing facilities Targetted a big-ticket acquisition in end 2006 - early bidder for betapharm, a generic drug firm in Germany which was later acquired by Dr Reddy’s Laboratories Limited Acquired 3 major companies for $453 million in the last 30 months (Ireland based Pinewood Laboratories for $150 million, Negma Laboratories of France for $265 million and Morton Grove Pharmaceuticals of US for $38 million)
A sob story today….
• • • Current market price of INR 89.85 Debt equity ratio of 2.3:1 Current debt of INR 3400 crores – more than 3 times market capitalization of INR 936 crores • Forex derivative losses of $300 Mn which must be paid within the next 6 months • • • • Unconverted portion of FCCBs: $ 108.5 Mn Interest payable for unconverted FCCBs: $ 32 Mn Total amount due on maturity date (Sept 25, 2009): $140.5 Mn Fitch downgraded long term rating from A to C and maintains a negative rating watch
Getting out of jail
Chairman and MD Habil Khorakiwala resigns paving the way for his son Murtaza to take over the leadership of the company Corporate Debt Restructuring (CDR) through ICICI Bank – statutory audits delayed and results for Q4 2008 declared on 25th April 2009 Issue of INR 500 crores worth of preference shares at a face value of INR 5 approved in January 2009 Embarks on a divestment plan with a strategic partner for non core businesses and activities. Licensing out biotech drugs under development to a partner Authorized share capital increased to INR 175 crores from the existing INR 125 crores through issue of 10 crores equity capital ICICI, IDBI and SBI prepared to lend to the company for pre payment Divesting minority stake in Wockhardt hospitals
FCCBs issued by TATA Motors • April 2004 tranche I: $300-million conversion price INR 780.40 maturity on March 28, 2011 tranche II: $100 million conversion price of INR 573.10 maturity on March 28, 2009 • July 2008 raised $490 million conversion price INR 960.96 maturity comes on June 12, 2012 repurchased 170 Zero Coupon Convertible Securities at avg. price of 50.375%. outstanding bonds reduced from $490 million to $473 million.
March 2006 $100 million raised in Japanese Yen (JPY 11760 million) convertible at INR 1,001.39 maturity on February 19, 2011 repurchased 30 Zero Coupon Convertible Notes at an average price of 54.27% outstanding bonds reduced from JPY 11760 Mn to JPY 11460 Mn 15-Apr’09: Tata Motors share prices jumped 12.41% to INR 283.50 on BSE after the company repurchased and extinguished its US and Japan listed foreign currency convertible bonds at 50% discount
RBI’s recent guidelines
In December 2008, RBI relaxed guidelines of FCCBs to companies by allowing premature buy-back of FCCBs through rupee resources On March 13, 2009, RBI further liberalised the norms by extending the deadline for companies to complete the buyback by nine months from March 31, 2009 to December 31, 2009 In April 2009, Under approval route, RBI relaxed amount of buy back from $50 Mn of the redemption value per company to $100 Mn The FCCBs bought back/repurchased from the holders must be cancelled and should not be re-issued or re-sold
Points to ponder
Increase (from $50M to $100M) in limit of premature buy-back of FCCBs using Indian currency
- Very less impact because of unavailability of sellers and a scarcity of funds with Indian companies.
Another option is to buy back those bonds using foreign currency reserves or through fresh borrowing in foreign currency (No limit)
- But raising funds in foreign markets at this moment is a big challenge (Global credit crunch).
So it benefits only those companies who have enough cash in their internal accruals
- But there are not many companies
Parting thought … "Some debts are fun when you are acquiring them, but none are fun when you set about retiring them”
~ Ogden Nash
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