The Anil Ambani-promoted Reliance Communications (RCOM) is set to be the first company to buy back foreign currency convertible bonds (FCCBs) after the Reserve Bank of India (RBI) allowed premature buyback of such bonds through rupee resources as well.
The company had issued zero-coupon FCCBs in February 2007 to raise $1bn. The bonds are now trading at a 35% discount to the issue price.
At this price, RCOM has to spend $650 million. The RBI has allowed FCCB buybacks through rupee resources provided the amount of the buyback is limited to $50 million and the resources are drawn out of the company’s internal accruals.
The company has over Rs10,000 corer in cash reserves ($2 billion). This includes about $600 million worth of investments in mutual funds overseas. RCOM’s move will help it reduce the liability and forex exposure. We maintain a BUY on the stock.