Mumbai: At least half a dozen Indian firms are planning to raise money through a variety of instruments such as foreign currency convertible bonds, or FCCBs, global depository receipts (GDR) and even plain vanilla debt to redeem existing FCCBs that are coming up for redemption in next six months.
Indian firms extensively raised FCCBs, a quasi-debt instrument, in the bull run of 2005-07 to fund expansion. Typically, these bonds are converted into equity if stock price of the company rises above the conversion price. If this does not happen, the issuer needs to treat the bonds as debt and redeem them.
According to a January report of London-based KNG Securities, FCCBs of around 25 companies are coming up for redemption in next few months. Some of these firms such as Tata Motors Ltd, HCC Ltd, GHCL Ltd, Nectar Lifesciences Ltd and Aftek Infosys Ltd among others have either enough cash on books to meet the redemption or their stock prices are near the promised conversion price.
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But this is not the case with companies such as India Cements Ltd, Suzlon Energy Ltd, Aurobindo Pharma Ltd, Sakthi Sugars Ltd, Ankur Drugs and Pharma Ltd, JCT Ltd and Paramount Communications Ltd. Each of them has drawn up plans to meet their redemption deadlines.
In the financial meltdown of 2008-09, when the stock market crashed, stocks of most of the companies dropped to around 70-80% lower than the conversion price. Since then many stocks have recovered but not all.
For instance, with a market capitalization of Rs2,810 crore, India Cement’s stock price (Rs92.55 a share on Thursday) is not even a fourth of the promised conversion price of Rs451 a share. The company has FCCBs worth $75 million coming up for redemption in May 2010.
Without enough cash on books, India Cement has tied up with three domestic banks for a rupee loan, V.M. Mohan, joint president and chief financial officer of the company said.
“We have raised part of the outstanding from three banks for one year. Being expensive, this rupee loan will then be refinanced by the options available next year,” he said.
According to him, the company had raised money by way of equity dilution last year and hence a GDR issuance was not an option.
The Reserve Bank of India in fiscal 2009 opened a one-year window under the automatic route for Indian firms to raise foreign currency loans to buyback the bonds at a discount to the conversion price from the bond holders. “Though the window under the automatic route is closed, Indian companies can raise money overseas after getting an approval,” an investment banker who has helped companies raise money through FCCBs said.
Aurobindo Pharma, which has two set of bonds worth $139 million coming up for redemption in May, has plans to raise a foreign currency loan.
An Aurobindo spokesman said: “We will be able to use the cash on books to pay up to 50% of the outstanding bonds redemption value. For the rest, we will raise dollar swap loan. We are in talks with a couple of banks abroad to raise the foreign currency loan.”
Aurobindo has to repay a total of $210 million to the bondholders including the redemption premium. The company is also facing pressure on its financials after US sales were impacted following a ban on its Hyderabad antibiotics unit in January. Around 10% of its US sales are sourced from this facility.
Previously, drug maker Wockhardt Ltd had defaulted on its $110 million FCCB repayment due in October 2009. The aggrieved bond holders, including Carlyle, QVT and a foreign unit of rival drug maker Sun Pharmaceuticals Industries Ltd, approached the Bombay high court, which ruled in their favour. Wockhardt was in trouble due to huge losses following an unexpected impact of its investments and foreign currency derivatives.
Though the experience of Indian corporations and bond holders alike has not been good with FCCBs, there are a few companies that are issuing fresh bonds and using the proceeds to pay the existing bondholders. Videocon Industries Ltd raised $200 million in December 2010 to part-finance its expansion and also clear dues to existing bond holders.
“Though the appetite for new issuances is still low in overseas markets, there are lot of companies that are trying to refinance their old FCCBs by issuing new (ones),” Samir Bahl, executive director, Centrum Capital Ltd, a domestic investment bank, said.
Bahl, who is helping some companies raise FCCBs, said the new issuances would come with higher interest rates of around 5% and reasonable redemption premium of around 25%.
Refinancing of bonds is different from restructuring of an existing facility where the terms and conditions of the bond holders change while the issuer is given more time to redeem them. “Refinancing of bond is when a new set of bonds are issued,” Bahl clarified.
Suzlon Energy restructured part of its $500 million FCCBs in May last year and has around $35 million worth of bonds coming up for redemption in 2012.
According to an investment banker, who did not wished to be named as Suzlon Energy is his client, the company is looking at a GDR issuance in the current financial year.
A company spokesman said in an email: “With our steadily improving performance we are confident (that) our share price will move up to enable conversion; on the GDR question, please note that we don’t issue guidance as a matter of policy.”
“When the company management does not show willingness to pay up in full, the only resort we have is to take them to court. To avoid the ardous task, we sat down and negotiated with the bankers of the companies to see if money can be raised to redeem the bonds,” an official who works for a fund that subscribed to bonds of three companies that are coming up for redemption this year, said. The fund refused to sell bonds to the companies when the premature buy back window was opened by RBI.
“The stock price failed to move up, and selling the bond at a 50-60% discount to the conversion price was like taking a haircut to exit the investment. Though those were desperate days, we held on to the investments and will get our due,” the official said.
FCCBs worth $7.5 million are coming up for redemption in August 2010 for Paramount Communications, a telecom cables manufacturer. The company bought back part of the outstanding FCCBs last year when RBI permitted companies to buy back premature bonds using external commercial borrowings (ECB) and internal rupee accruals. Ratan Aggarwal, chief financial officer of Paramount Cables, said: “We do not have funds to pay the bond holders and the stock price clearly indicates there will be no conversion. We are in talks with the existing bond holders to either roll over the existing bonds with a lower conversion rate or issue fresh FCCBs to repay the existing bond holders.”
The company had promised a conversion price of Rs42 a share. The stock price of the company was Rs4.25 a share on Thursday on BSE.
With an outstanding FCCB of $28 million Sakthi Sugars is looking at raising fresh bonds, a foreign currency loan and even dilution of equity by the promoters to meet the redemption.
According to a senior company official, $13 million worth of bonds are held by three bankers of the company. “We are discussing with our bond holders to redeem at a discount,” the official added.
According to an investment banker who did not want to be identified, companies such as Ankur Drugs and JCT will find it difficult to raise money as they are already highly leveraged. Sanjiva Jain, cheif financial officer of JCT, declined to comment on the company’s plans to meet the redemption; none of the executives of Ankur Drugs could be reached for comment.
Graphic by Ahmed Raza Khan/Mint