Foreign currency convertible bonds, or FCCBs, are losing favour among local companies as a means of raising capital, due mainly to the market volatility and the bad experience of issuers in the recent past.
Going by Prime Database, only `4,899.41 crore was raised through this route last fiscal, the second lowest in seven years.
Between fiscal 2005 and fiscal 2008, local companies had raised more than Rs22,000 crore a year through this route. The financial crisis that followed caused promoters to avoid this route almost totally in fiscal 2009, though confidence returned in fiscal 2010, with Rs13,058.29 crore being raised through FCCBs.
A convertible bond is a mix of debt and equity. While it makes regular coupon and principal payments like a bond, the bondholder has the option to convert the bond into stock if the stock price at maturity is higher than pre-agreed conversion price. If the bondholder chooses not to convert the bonds, the company needs to pay back the principal to the bondholder.
According to London-based KNG Securities LLP, the outstanding amount of Indian FCCBs as on March 31 stood at $12.75 billion, down 15% from a year ago.
Experts attribute the slowdown in FCCBs to corporates’ apprehension that the volatile markets would not allow them to get the right valuations and their equity would get diluted if the market price at maturity is lower than the conversion price.
“During the bull run of 2005-2008, many of the companies had raised money in the hope that market valuations would continue to increase and this would make raising money through FCCBs cheaper as equity dilution on conversion would come down by 2-3 times at maturity,” said Ramprasad M, chairman, Mape Advisory Group.
“But then, with prices crashing, they would have to redeem these FCCBs using their own funds or through debt. Also, if they settle for conversion, they will have to go for high equity dilution.”
“It is not a question of demand because there are enough investors overseas who are willing to lend, but the Indian firms are not willing to come to the table. The point is that a lot of companies are not really comfortable with what levels they are getting in the market and the promoters are not really willing to dilute their holdings,” said a London-based dealer in the convertible market.
Also, some experts believe foreign investors are cautious in lending to Indian corporates. As such, the companies’ obligations towards payments on FCCBs are limited compared with their obligations to bondholders. Then again, their experience of dealing with Indian companies of late has been far from good.
“Lack of corporate governance and ambiguity on overseas bondholders’ rights have led investors to shy away from Indian FCCB market. Ongoing domestic corruption scandals have further exposed a weak regulatory system in India. It’s critical to plug those loopholes so as to keep the overseas funds flowing to this growing economy,” said Prashant Sawant, analyst at KNG Securities LLP.
Sawant cited the example of Wockhardt whose bondholders have been knocking on the doors of the Bombay High Court. Then there are those smaller companies like Pyramid Saimira and Mascon Global which have defaulted on coupon payments. Also bondholders of Cranes software (€42 million, matured on March 18), Marksans Pharma ($44 milion, matured in November 2010) are still awaiting redemption.
Going ahead, a significant number of issues is set to mature or get redeemed in the next 4-6 months, which is likely to shrink the FCCB universe further unless new deals come to the table.
Experts see FCCB issuances rising as interest rates move up. “Indian companies do come to us, but they are more of an exploratory nature. In future, Indian companies should come for FCCBs given the way interest rates are moving in India and given the differential between dollar rates and rupee rates and also because the RBI’s policy is moving into a tighter liquidity situation,” said the dealer.
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