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A neat arbitrage by Firstsource Solutions

A neat arbitrage by Firstsource Solutions

That’s when the company began buying back its foreign currency convertible bonds (FCCBs) from investors at a steep discount.

Firstsource had raised $275 million in December 2007 (Rs13,832.5 crore today), and after the crash in its share price last year, it was a near certainty that the bonds won’t be converted and would end up as debt on the company’s books.

The conversion price (at maturity) after all is Rs128.60. This, in turn, severely affected the company’s valuations.

Earlier this year, Firstsource’s market cap had fallen to a fourth of its estimated revenue for the year. Besides, FCCB holders were willing to sell their bonds at a discount of about 68%, data collated by Bloomberg show, indicating fears of a default.

Also See Gaining Value (Graphic)

Firstsource’s decision to buy back FCCBs from the market at a discount is essentially a neat arbitrage. It has taken an external commercial borrowing (ECB) and has already bought back bonds worth $53 million (face value of $49.7 million plus interest for about a year).

According to the company’s chief financial officer, Carl Saldanha, the bonds were bought at a discount of about 50% to face value, meaning the purchase price is only about $25 million. That’s a cool saving of $28 million or Rs143 crore (the net savings are actually lower, since the rupee has depreciated by about 25% since Firstsource took the FCCB loan).

Also, while the FCCB was payable in December 2012, giving the company less than four years to raise the funds, the ECB gives it more flexibility. The new loan has a two-year moratorium and has to be cleared through regular payments in the following five years, that is, by March 2016.

The company hasn’t disclosed the amount of borrowing, but says that it has some more ammunition in its arsenal for the arbitrage.

Already, as the chart shows, the discount at which FCCB holders are willing to sell has narrowed.

From a high of 68% in late February, the discount has narrowed to about 48% currently.

Meanwhile, the company’s market cap has risen by about Rs250 crore since the company started buying back the bonds.

While this is much higher than the savings of Rs143 crore, it must also be noted that with every additional buy-back, the market’s discomfort about the company’s financial condition is easing.

Graphics by Ahmed Raza Khan / Mint

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