FCCBs unlikely to cause a crisis anytime soon

Corporates which have raised money through the foreign currency convertible bonds (FCCBs) route may yet be spared the pain from the rupee’s recent weakness against the dollar, feel experts.

That’s because not many of these bonds are due to mature in the short term, even though the total liability over the next 2-3 years is huge.

FCCBs are a mix of debt and equity instruments —- while they make regular coupon and principal payments like a bond, they also give the bondholder the option to convert the bond into stock if the stock price at maturity is higher than the pre-agreed conversion price; else, the company needs to pay back the principal to bondholder.

According to Bloomberg data, only 11 FCCBs are nearing maturity in the next three months with $598 million in total outstanding.

That’s quite small compared with the total outstanding amount of over $8.9 billion by the end of fiscal 2015.

The majority of the FCCBs, in fact, are due in fiscal 2013, say experts.

“There are no immediate worries in the near term arising out of currency depreciation for Indian companies,” said Prashant Sawant, analyst at KNG Securities LLP of London.

FCCBs due in the next three months include those from Reliance Natural ($300 million), Financial Technologies ($90.50 million) and Gitanjali Gems ($83.60 million).

Of these, Gitanjali Gems is ‘in the money ‘as its share price is trading well above the conversion price.

Others are seen exercising the buyback option given by the Reserve Bank of India (RBI) till March 2012.

“Some of the companies would avail RBI’s extended window for FCCB buyback to close the issue earlier,” said Dara Kalyaniwala, vice-president - investment banking at Prabhudas Lilladher. However, some of the smaller companies could have a problem at hand, he said.

Samiran Chakraborty, regional head of research at Standard Chartered India, concurred. “The sharp decline in rupee along with equity markets collapse would be bad news for some FCCB issuers. However the actual impact is difficult to state as these things are also dictated by RBI’s directives regarding buybacks.”

According to experts, there could be an issue if the market collapsed and the rupee remained weak over an extended period.

The research team at Standard Chartered sees the rupee at 49.80 by the end of March 2012 and 48.50 by June 2012.

Experts see a problem next fiscal, which will see close to $4.4 billion of FCCBs maturing.

“There are few companies which are already struggling to repay the existing as well as forthcoming FCCB redemptions. With majority of FCCBs up for redemption in 2012 calendar year, the unwillingness of Indian companies to repay the debt is an issue for the lenders,” said KNG’s Sawant.