Tuesday, March 6, 2012

Foreign Currency Convertible Bonds redemption fear still hangs

The tension of  redemption of foreign currency convertible bonds (FCCBs) seems to have been getting diluted on the investor community.  This year about $7 billion of FCCBs are due for repayment. This factor  had caused panic amongst the investors and market browser had clear reflection of this with all the shares pegged with FCCB  were heavily discounted in very first month of the year.

Some of the companies responded to challenge with entrepreneurial skill and the issue  got subsided, though the fear of default has not all evaporated. The main strategies adopted by the companies are : by raising new debts, selling assets, deferring their capex plans or restructuring .
Kotak Institutional Equities had estimated FCCB  with market value of USD $12.7 bn. Typically, companies issue FCCBs in order to raise capital at a relatively lower cost for the medium term. Until 2008 FCCB were favoured by hedge funds. But in 2006 to 2008 many Indian companies looked towards them as a major funding instruments. With booming share market, it looked to be a win-win situation for both investors as well  as companies.
Source  :  Business Line

Since January 2006, Indian firms have issued FCCBs worth $13.6 billion, out of which $7 billion worth of bonds are maturing by 2013. The plunge in stock prices and fall in rupee have raised concerns over these obligations.  Exposure to FCCB  is no more a desired  proposal on browsers.  Not all companies  had  negative sentiments. Tata Motors, Rajesh Exports and Surana Industries are a few companies who were traded at premium despite the FCCB dagger.
Redemption strategy of  Suzlon
will have major Impact

Reliance Communication  managed repayment of its  $1.12 billion (Rs 5,825 crore) of FCCBs due in the first week of March,  through a refinancing deal with a consortium of Chinese banks. The banks have extended a seven year debt to ADAG group company at an interest rate of about five percent.
The options  to raise external commercial borrowings (ECBs) is planned by the companies like JSW Steel, Gati and Orchid Chemicals. The raising of fund is at Libor rate plus four percent for five years. JSW and Orchid  have  liabilities worth $274.6 million  and $167.64 million respectively.
According to Filtch report  as many as 19 Indian companies still  are in danger of defaulting if no restructuring plan comes forward.  These include GTL Infra, Gayatri Projects, Indowind Energy, 3i Infotech, Gemini Communications, JCT, Shakti Sugars, Wolkhart,  Zenith Infotech and ICSA India. Suzlon  with a repayment of its $654 million (about Rs 3,249 crore)  would  set the sentiments of the investing community.
 Those companies  would be lucky where the holders convert the bonds to equity before maturity date.   But this depends on how the sensex moves, which  has  shown so much fluctuations and  unless pro industry budget is presented by finance minister Pranab Mukharjee, not much hopes can be pinned on this option.

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