Mumbai: Overseas investors have been dumping foreign currency convertible bonds (FCCBs) sold by Indian companies in a fallout of this year’s stock market decline, rupee depreciation and a looming economic downturn, a Mint analysis of Bloomberg data shows.
FCCBs are bonds with an equity element. They remain debt instruments as long as investors hold on to them. Investors convert their holdings into equity when the share price touches a conversion price promised by the issuer. If this does not happen, the issuer needs to treat the bonds as debt and redeem them.
These bonds are traded on foreign stock exchanges. Prices and bond yields move in opposite directions and the demand for a bond is determined by a higher price and lower yield. Yield is the cost the company has to pay for the debt until the bonds get converted into equity. The higher the yield, the fewer are the prospects investors see of the bonds getting converted.
With the Sensex, the benchmark equity index, falling at least 18% so far this year, widening the gap between the stock price and the conversion price, the demand for FCCBs has taken a hit. The rupee recently dropped to a lifetime low against the dollar and has lost some 16% since August when the slide started. Equities have slumped to a two-year low in the face of concerns about slowing economic growth.
While prices of bonds have moved by not more than 10% since January, the yields on some companies’ debt have increased more than three times, data shows.
“Indian convertible bonds have lost their sheen with most of the companies’ stock prices trading far below the conversion price. Investors have dumped the bonds in the last 11 months and data shows that,” said a hedge fund manager holding bonds of more than five firms, who requested anonymity as he is not authorized to talk to the media.
Even FCCBs of large-cap companies such as Tata Motors Ltd have suffered. The company’s stock price has fallen by 26.8% so far this year.
Mint’s Sneha Shah says that with markets falling and the rupee weakening, investors are fleeing from the foreign currency convertible bonds issued by Indian firms.
The yield on the first set of Tata Motors’ FCCBs maturing in December 2012 reversed from -2.019% at the start of the year to 6.346% in November. The yield on the second set of bonds maturing in October 2014 has changed from -13.21% to -3.664%.
While many see this as the function of a looming economic downturn causing investors to pull back, some say this is the result of redemption time drawing closer.
“As redemption keeps nearing, investors have a clearer view on whether the bond will be converted into equity. The yields are also a function of the current share price, currency volatility and the time gap to redemption,” said the head of debt at a large private bank on condition of anonymity.
Yields on the bonds of other top companies such as Financial Technologies (India) Ltd ($100 million, or Rs514 crore today) increased from 6.977% to 20.395% and Reliance Communications Ltd ($1 billion) from 6.629% to 28.993%.
The yield on 3i Infotech Ltd’s €30 million (Rs207 crore today) bonds increased from 24.52% to 41.15%, while that on another set of $100 million bonds rose from 18.117% to 24.45%. Hotel Leelaventure Ltd’s $100 million bonds saw yields increase from 10.519% to 18.393%.
Similarly, yield on Sterling Biotech Ltd’s $100 million bonds rose from 13.08% to 98.098%. Moser Baer India Ltd’s two set of bonds have seen yields rise from around 45-48% to 300-340% so far this year. The yield on JSW Steel Ltd’s $325 million bonds tripled from 3.15% to 10.664% in the last 11 months.
More than 60 separate FCCB issues are due for redemption in the next 12 months or so, having an outstanding cash obligation (including redemption premium) of $7 billion, according to KNG Securities LLP, which tracks Indian FCCBs. In 2006 and 2007, Indian companies sold some $14 billion worth of FCCBs when the rupee was trading at around 40 per dollar, KNG Securities said in a 2 December report.
The ability of a large number of mid-cap issuers to repay looks doubtful, the report said.
“We believe only a small proportion of companies (the larger caps) have hedged their foreign currency exposure. Generally speaking, small- to mid-cap companies have no US dollar protection,” the report said. “In addition, many Indian issuers do not have the natural hedge, i.e., overseas reserves derived from foreign subsidiary incomes. We believe that with the weakening currency, these companies in particular will struggle to repay FCCB debt.”
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