Mumbai: Trailing stock prices, high debt on books and low promoter shareholding will pose problems for conversion and redemption of foreign currency convertible bonds or FCCBs of companies, according to a report by rating agency Crisil Ltd released on Monday. The report highlighted S&P CNX 500 companies’ FCCB conversions scheduled for the 2013 fiscal year.
FCCBs worth Rs22,000-Rs,24000 crore will either get refinanced or their conversion prices will have to be revised downward, leading to equity dilution for current shareholders, Crisil said.
“These options will adversely affect their financials. Moreover, companies with close to Rs15-20 billion worth outstanding FCCBs having high debt levels and already low promoters’ stake will face significant challenge in meeting repayment obligation,” pointed out the report authored by Kelvin Shah, Rahul Prithiani and Prasad Koparkar.
Overall, FCCBs worth Rs31,500 crore are due for redemption over the next two years for S&P CNX 500 companies.
The report compared the 3 May stock prices of companies having outstanding FCCBs with those on 8 January 2008, when the CNX Nifty recorded a high that was pierced two and a half years later, on 5 November, 2010.
During the 2007 and 2008 fiscal years, when Indian equity markets were on a roll, many local firms raised money through FCCBs, a hybrid instrument that combines debt and equity, to fund growth and expansion.
According to the report, the CNX Nifty, which is currently at 5,565 (3 May), is down around 10% from its high of 6,287 recorded on 8 January 2008. On 5 November, 2010, Nifty closed at 6312.
However, share prices of many companies (constituting 57% of the outstanding FCCBs due for redemption by 2012-13) are still trailing at a discount of at least 50% to their market price of 8 January 2008.
“Moreover, the profitability of many of these companies is already under pressure because of rising inflation and interest rates. In this scenario, the maturing FCCBs will exert further pressure on their profitability,” the report said.
It has taken into account a company’s net gearing after dilution of the promoter holding at current market price, parent company support, profitability and cash flows, to evaluate the possibility of redemption or price reset.
If all these firms choose to redeem their FCCBs when they mature, the repayment to the bondholders will run up to Rs30,100 crore, including a premium of Rs7,100 crore, which is more than half the companies’ profit in the last four quarters.
In 2008, Wockhardt Ltd defaulted on its FCCBs after which its bondholders dragged the drug maker to the court. In February this year, the court ruled in favour of the bondholders and initiated liquidation proceedings.
“The Wockhardt case has taught many promoters that defaulting can be a messy affair and hence many companies are already in talks with bondholders to rollover with revised terms and with banks to refinance the bonds,” said an investment banker advising clients on FCCB issuance and redemption.
According to the banker, those companies that are preparing for the redemption, even if that’s a year away, will be able to ward off the pressures.
Going by the Crisil estimate, for companies with net gearing of less than 1.5 times or promoter’s holding of at least 35%, having strong parent support and strong profitability and cash accruals, redemption pressure will be less.