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FCCB repayments: a case for overhauling the CDR mechanism

FCCB repayments: a case for overhauling the CDR mechanism
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First Published: Wed, Oct 12 2011. 10 58 PM IST

Updated: Wed, Oct 12 2011. 10 58 PM IST
Wockhardt Ltd has cleared a key hurdle in the sale of its nutrition business to Danone SA, which is to fetch it about Rs 1,300 crore. The sale proceeds will help strengthen the debt-laden firm’s balance sheet. The Bombay high court has ordered the company to repay the outstanding dues of foreign currency convertible bond (FCCB) holders. The decision clears the way for the sale of the nutrition business.
On Tuesday, Wockhardt’s shares rose about 11%; they fell 2.2% on Wednesday, but are still up significantly from Monday’s close. The decline could either be due to profit-booking, or the realization that while the sale looks destined to happen, FCCB holders have won the case. The decision itself can be appealed. But in its present form, it leaves minority shareholders—and perhaps lenders too—to rethink how they view corporate debt restructuring (CDR) exercises.
A CDR package sets out a clear path for a company to emerge from the financial mess it is in. Traditionally, secured lenders (FCCB holders are unsecured) dominate proceedings, with unsecured ones having little say. Wockhardt’s case is one of the few high-profile cases where FCCB holders protested, went to court, and won.
In the original CDR proposal, FCCB holders were told half their liabilities were to be converted to 0.01% non-convertible preference shares to be redeemed on 31 December 2018, at a 38% premium. They would get optionally convertible preference shares, which could be converted into equity shares between 2015 and 2018, or redeemed on 31 December 2018, without any redemption premium. Now, the court’s decision will see Wockhardt pay Rs 417.5 crore in five instalments by August 2012.
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But secured lenders will be unhappy. Wockhardt will now have to fork out substantial cash in the current and next fiscals to the winning FCCB holders. A default in repayment will trigger the appointment of a liquidator. Thus, secured lenders may control Wockhardt’s finances, but they may have no choice but to allow it to make the payments. The FCCB holders will, therefore, get their dues before secured lenders do. This case calls for the CDR process to be overhauled to include all creditors—secured or not— and make it more watertight.
Minority shareholders are right to be relieved at the prospect of the sale of the nutrition business going through. At the same time, a chunk of that money will go to repay bondholders, which would have otherwise been due only in the distant future. As a result, the benefits to the company from the Danone transaction will be lower, which may affect cash flow projections of analysts and the company’s valuations, too.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Wed, Oct 12 2011. 10 58 PM IST