- Wealth PMS
There has been consternation about Foreign Currency Convertible Bonds, or FCCBs recently, and this is a more detailed post on them.
An FCCB is basically like this:
Most offerings had conversion prices at a “premium” to the then market price, assuming, as investors do, that stocks only go up in the long term. Interest rates, or “coupons”, were at zero percent or extremely low figures of 1-2% . The typical term of an FCCB was five to seven years.
India went gung-ho on FCCBs in the 2004-07 timeframe, when stocks went nuts. This is now reaching redemption zone, and hurting.
More than 50,000 cr. worth FCCBs are nearing maturity soon, and of this the next two years will see between 35,000 and 40,000 cr. worth of bonds maturing. Conversion prices are far above current market prices, so the companies have to pay investors back.
Their choices are:
The problem is compounded by…
When the FCCBs were taken, the rupee was at values of Rs. 40-44. Today, the rupee is at Rs. 52 to a dollar. That means to buy the same number of dollars and pay back, companies need to pay 20% more! This is apart from the coupon interest; and given that if they try to pay back the FCCBs, they will end up flooding the market with buy orders, the rupee will fall even more.
This rupee fall hurts “conversion” as well. Consider an FCCB issue with the dollar at 44, and a conversion price of Rs. 440. That means one share = $10 worth. Today, even if the stock stays at Rs. 440, it will be worth just $8.46 – a loss of 15%. To break even, the stock needs to be at least Rs. 520.
This hurts more when companies borrowed to deploy money in India – if they used the funds abroad, the return on those funds would also be in dollars so the impact is lesser.
Zenith Infotech defaulted on $33 million worth of FCCB repayments in October. But it sold a part of the company, Zenith RMM, to a fund called Summit Partners at an undisclosed amount, and the remaining shareholders have gone to court saying dudes, if you got that money, you gotta pay us. Summit has said they will share transaction details if they are kept out of reach of other bondholders.
Tata Steel offered to increase coupon rate from 1% to 4.5% if bondholders increased the tenure from 2012 to 2014, which it could do because of its size.
Wockhardt attempted a default, and after investors went to court, will pay back the 473 cr. it owes, over five tranches till Oct 2012. Interestingly, secured local lenders like SBI and ICICI have claimed a higher seniority on their loans compared to the unsecured FCCB holders, which means they want to get paid first. Let’s see how that develops.
Yields on the bonds of other top companies such as Financial Technologies (India) Ltd ($100 million, or Rs514 crore today) increased from 6.977% to 20.395% and Reliance Communications Ltd ($1 billion) from 6.629% to 28.993%.
The yield on 3i Infotech Ltd’s €30 million (Rs207 crore today) bonds increased from 24.52% to 41.15%, while that on another set of $100 million bonds rose from 18.117% to 24.45%. Hotel Leelaventure Ltd’s $100 million bonds saw yields increase from 10.519% to 18.393%.
Similarly, yield on Sterling Biotech Ltd’s $100 million bonds rose from 13.08% to 98.098%. Moser Baer India Ltd’s two set of bonds have seen yields rise from around 45-48% to 300-340% so far this year. The yield on JSW Steel Ltd’s $325 million bonds tripled from 3.15% to 10.664% in the last 11 months.
It will be important to keep FCCB redemptions in mind as the months go by, and to track them. I’m building an excel sheet to see if prices move suddenly on the FCCB repayment due stocks, and will in general avoid going long on them unless they are actually able to pay their dues properly. But a lot of things will be impacted, as Rs. 50,000 cr. is not a small amount; the dollar-rupee rate, and thus the price at which we buy oil, and thus inflation.
If there are many defaults, the banking system might be hit as well. This is more of a “beware” post than an action post; more on individual companies and an FCCB List later.