Indian firms still coming to terms with new realities of FCCB market

Indian firms still coming to terms with new realities of FCCB market

Suzlon Energy Ltd’s foreign currency convertible bond (FCCB) issue was the first by an Indian company in this calendar year. On one hand, this reflects the fact that FCCB issuances by Indian companies have all but dried up. But on the other hand, the fact that a heavily debt-laden company such as Suzlon has been successful in raising funds clearly shows that investor demand is not a problem. At the right price and terms, Indian companies can tap the FCCB market for funds.

Globally, convertible bonds are in demand as an asset class, and a shortage of new issuances has led to a rise in the prices of these bonds in the secondary market. But despite an apparent demand for convertible bonds, Indian issuers have shied away from the market.

According to an investment banker who specializes in convertibles, the main reason for this is that Indian issuers haven’t still come to terms with the new realities of the market. They are still used to setting the conversion price at a relatively high premium as well as offering a zero coupon bond.

The reason Suzlon was able to find investors for its $150 million (Rs 660 crore today) issue was it settled for a modest 10% premium to the average traded price in the preceding two trading sessions. Also, its bonds carry a cash coupon of 5% payable semi-annually.

A report by FinanceAsia says that Suzlon’s issue was structured to be equity-like, with a conversion premium of only 10% and a mandatory conversion after three years, subject to a 130% hurdle. In other words, instead of having a call option to convert their bonds into equity, bond holders would have to mandatorily convert if Suzlon shares trade at a 30% premium to the pre-agreed conversion price.

Of course, another factor that worked in Suzlon’s favour was that its shares are part of the derivatives segment. As a result, bond investors can hedge their delta risk using the futures market. Delta here is the sensitivity of the convertible bond value to the price of the underlying stock.

But regardless of whether or not investors can hedge their delta risk, a whole lot more issuances can happen if, like Suzlon, Indian companies are willing to offer a cash coupon and settle for a relatively low conversion premium.

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