FCCB buyback deadline extended; benefits few

The Reserve Bank of India (RBI) has extended by 9 months the deadline for buyback of foreign currency convertible bonds (FCCBs) issued by companies — from June 30, 2011 to March 31, 2012.

Experts said that won’t be of much use since few bonds are maturing in the next 12 months.
“Also, bondholders are unlikely to sell at a discount closer to maturity. The equity market has also revived from its lows of 2009,” pointed out an analyst with a domestic brokerage.

The RBI said the extension was announced considering the weak equity market due to which many bonds are trading at deep discounts to their issue price.

Yet, this will come as a relief to companies whose bonds faced maturities but they were unable to buyback due to funding issues.

A convertible bond is a debt cum equity instrument. Bondholders get regular interest payments — or the so-called coupon — apart from principal repayment.

They also have another option — to convert the bonds into equity shares if the price at the time of maturity of the bond is more than pre-agreed conversion price. If that isn’t the case, the bond-issuing company has to pay the principal back to the holder.   

Approaching maturities and sub-conversion price share prices had put pressure on many companies to buy back.

The only alternative for issuers were redemption or revision of conversion prices downwards, which would have led to larger equity dilution.

The RBI had in its recently released financial stability report expressed concern over the ability of companies to buy back given the large number of maturities over the next two years.

As many as 100 FCCB issues will come up for maturity till March 2013. According to data from London-based KNG Securities LLP, bonds worth $3.5 billion are set to mature by June next, which will lead to an outflow of $4.5 billion including the coupon and redemption value.

According to guidelines, the companies would be able to prepay or buyback the bonds under the ‘automatic’ route in addition to the approval route.
Under the automatic route, companies are allowed to buy bonds prematurely at a minimum discount of 8% to the book value.

But this may not be of much help to companies, said experts. “We often witness situations where companies would like to repurchase bonds that are offered at discounts more than the 8% suggested by the RBI. But these companies are unable to do so as the RBI does not permit such transactions,” said Prashant Sawant, analyst with KNG Securities LLP.

According to Prime Database, more than 200 companies had raised close to `72,000 crore through the FCCB route during 2006-2008 as global equities roared.