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The JP Associates FCCB Issue

Kiran has an interesting post on the JP Associates FCCB Issue that’s caused the stock to tank from the Rs. 78 levels to Rs. 65 in a week (16%). This is partly from our discussion on twitter and feedback (from @chondhe) has refined it.

The Facts

  • JP Associates sold $400 million of FCCBs in 2007, maturing 12 Sep 2012.
  • This can be converted at a price of Rs. 165.17, at a fixed $-Rs. ratio of Rs. 40.35. That means if you paid $1000 in 2007, it becomes a fixed Rs. 40,350 today and will buy you about 244 shares. You can’t get more shares than that. This, in today’s price of about Rs. 65 and a price of Rs. 55 to one dollar, is worth $288. Conversion is voluntary, so if you don’t choose to convert, you can:
  • Redeem the bonds for a premium (or "interest") of 47.7%. Meaning, for your $1,000 you can get $1477.
  • Choosing between $288 and $1477 is a no-brainer.
  • Therefore, all investors will chose to redeem the bonds, not convert them.

The Numbers

  • There are $354.475 million worth FCCBs outstanding (the rest were either bought back by the company or converted a while back)
  • That, at the 47.7% premium, means $523 million needs to be paid back on September 12, 2012.
  • This is a sum of Rs. 2875 crores.
  • It is very unlikely that JP has the money. They are likely to have to borrow it.
  • A few days back, they issued new FCCBs of $150 million, at a conversion price of 77.5. That would result in about 106 million shares (at $1=Rs. 55) being issued if converted, a 5% dilution since they have 2.2 billion shares (212 cr. shares) outstanding.
  • Also, they have to pay a coupon interest of 5.75% p.a. (semi annual).
  • Still, this $150 million covers just Rs. 825 crores of the repayment. There’s more than $2000 cr. they still have to repay.
  • The final problem – the amount they got when the issued the FCCB = $354 million * Rs. 40.35 per dollar = Rs. 1428 cr.

The Problem

  • Five years ago, they borrowed Rs. 1428 cr. (It was more, but let’s subtract what they bought back)
  • Today, they have to pay back Rs. 2875 cr.
  • This is partly due to the interest they pay – a bullet payment of 47% at the end – and partly due to the rupee going from Rs. 40.35 to Rs. 55 today.
  • That means they have to pay an excess amount of nearly Rs. 1450 cr., of which they have raised only Rs. 825 cr.
  • The rest will have to be borrowed locally. In fact they will probably need to borrow even the principal locally. Net of the new FCCB issue they should have to return Rs. 2000 cr. to the original FCCB investors.
  • Kiran talks about the accounting issue – that local debt will involve different accounting as the interest paid has to hit the P&L every quarter (the FCCB would only silently hit the balance sheet – a very wrong thing in my opinion).
  • JP Associates made just Rs. 633 cr. in consolidated profit in FY 2012.

A caveat: JP says it has hedged about $250 million of forex exposure in the above FCCB. I don’t know at what price they have hedged it. Most likely, it’s around 50 or higher, but the exact number is likely to impact the above figures.

Sources (Annual Report)

Conclusion

They have to make a payout now and one more in January. I will wait till these are over and the drama around them. Disclosure: Not long or short this stock.

The company is going to hurt if liquidity troubles don’t ease. They now have a burden of Rs. 50,000 crore (500 billion) in debt. Looks like a worthwhile shorting opportunity.

  • Sanjeev B says:

    Deepak, how did you get the figure of Rs.50,000 cr at the end?
    Also (and this may be related to the question above): In ‘The Numbers’ section of the post, you’ve mentioned “There’s more than $2000 cr. they still have to repay.” Shouldn’t this be “There’s more than Rs.2000 cr. they still have to repay.”?
    Other than this, a great analysis. What’s the best way we can short JP Associates?