FCCBs that offer value for bondholders

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FCCBs that offer value for bondholders

The BNP Paribas report is optimistic that most companies would honour their FCCB repayment commitments, and would not force bondholders to accept a significant cut in the principal .

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In the years 2006 to 2010, several companies went ahead and raised millions through Foreign Currency Convertible Bonds. Many of these companies are on a sticky wicket today as conversion price of these bonds stand significantly higher than the current market price of the concerned stock.

FCCBs are a special category of bonds, issued in currencies different from the issuing company's domestic currency. Corporates issue FCCBs, through a mix of debt and equity, to raise money in foreign currencies. An FCCB holder receives regular coupon payments and also enjoys the option to convert the bonds into equity shares.

Analysts point out that FCCB is a double edged sword and typically conversion price is set according to the demand and supply at the point of issuing an FCCB. But there is value for investors here. Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies are pricing in significant financial distress, and offer good capital appreciation opportunities for investors in days to come, says a recent report published by BNP Paribas. Interestingly, the report bets on `capital appreciation opportunities' for bondholders with a belief that principal amounts may not be trimmed significantly.

The report has handpicked a few companies in support of its case. For example, Reliance Communications, which raised USD 1.27 billion through FCCBs in 2007, is maturing on  3/1/2012. As the company finds itself in a quandary of repayment, the bond trades at high yield to maturity (YTM) of over 26% which is sure to generate significant `capital appreciation' for investors going forward  The stock's current market price stands at Rs 74 and conversion price is Rs 668.3.

It is, of course, debatable how these companies would sponsor FCCB redemption. Market experts say many companies would begin negotiations to buy time as the maturity date nears. Some would restructure their FCCBs offering higher coupon rates. The BNP Paribas report is optimistic that most companies would honour their FCCB repayment commitments, and would not force bondholders to accept a significant cut in the principal.

Below is the list of BNP Paribas choice of companies with high YTM

Jhini Phira

Jhini.phira@network18online.com