There is now no question of the bonds being converted into shares. Wockhardt shares now trade at only Rs100 and need to rise by at least six times for bond holders to consider converting their shares.

Based on news reports, the company is in the process of raising funds to pay back its bond holders. The trouble is its market capitalization is only around $220 million, which means equity could diluted by as much as 60% if the company raised $133 million by issuing fresh equity. Raising the funds by issuing debt is also a challenge since the current debt-equity ratio is more over 2:1, even after excluding the FCCBs. What’s heartening is that the repayment on this debt worth around $570 million is due only from 2011.

Also See Liquidity Crunch (Graphic)

Banks would be naturally reluctant to lend the entire amount, which explains news reports (including one in Mint last month) that the company is talking to private equity companies to issue fresh equity. But given the danger of high dilution, it’s likely that the fund raising would be a mix of debt and equity.

The net result in any case is that earnings per share will be much lower than what the markets had earlier anticipated. Higher interest costs would shave off earnings on the one hand and equity dilution would reduce earnings attributable to existing shareholders further on the other.

These negatives are now reflected in Wockhardt shares, which trade at less than three times past earnings. Current prices suggest the markets are worried Wockhardt may not be able to pay back its debts. Even considering current high interest rates, the company should easily be able to service the interest portion of debt of Rs3,500 crore (assuming the FCCBs are refinanced through debt), considering that it has generated operating profit of Rs800 crore in the past 12 months.

Wockhardt’s business is doing well and analysts expect operating profit to rise to Rs900 crore in the next year. The worry, however, is about the repayment of the debt from 2011 onwards, given the low free cash flow the company has been able to generate so far. Last year, the company generated about Rs370 crore cash from operations but much of that (Rs330 crore) was spent in capital expenditure.

These concerns seem to be driving banks’ unwillingness to fund any more of Wockhardt debt.

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Graphics by Paras Jain / Mint