As rupee wobbles, focus is on FCCBs maturing near term

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As rupee wobbles, focus is on FCCBs maturing near term

A sliding rupee could well compound the misery of companies where foreign currency convertible bonds (FCCBs) will be maturing shortly. Already, the stock prices are way below the conversion price, which means holders of the FCCBs will want their principal back, instead of converting their loan into the issuing company’s equity.

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Anisha Mappat & Riken Mehta
Moneycontrol.com

A sliding rupee could well compound the misery of companies where foreign currency convertible bonds (FCCBs) will be maturing shortly. Already, the stock prices are way below the conversion price, which means holders of the FCCBs will want their principal back, instead of converting their loan into the issuing company's equity.

FCCB is a hybrid security, with both debt and equity features, where in the FCCB-holder has the option to convert his loan into the issuing company's equity at maturity, at a pre-specified price.

A weaker rupee will aggravate the problem of the companies, as the companies now need more rupees to buy the required dollars and pay off the bond holders. The India rupee was the worst performing currency in the last five months, falling around 20%. The slide has to do with both the strengthening of the dollar against other currencies, as well as worsening of the Indian government's finances.

Take for instance Jaiprakash Associates . The Manoj Gaur-controlled firm issued FCCBs worth USD 400 million in 2007, with the conversion price set at Rs 165 per share for bondholders. However, due to bearish market conditions and some company-specific issues, the stock is now quoting at a third of its conversion price. This means that there is no real chance for the outstanding FCCBs worth USD 354 million being converted into equity, at maturity (September 2012). So, Jaiprakash Associates will then have to repay its outstanding loan to bondholders.

The effect of the rupee in this scenario is with regards to the amount of cash outflow Jaiprakash Associates will face while replaying its outstanding bondholders. With the rupee near its lifetime low against the dollar, the company will have to shell out more in rupee terms so as to repay its outstanding FCCBs worth USD 354 million. For a company that is already facing several problems, this is a double whammy.

According to an IIFL report, 2012 is going to see FCCBs totaling USD 5.3 billion due for redemption. However, the actual redemption value is a whopping USD 7.2 billion, the highest ever amount yet. With stock prices of almost 90% of FCCBs significantly below conversion prices, a vast majority of companies are in for a difficult year ahead.

For list of companies that have FCCBs due for conversion this year, Click on the attachment.

anisha.mappat@network18online.com
riken.mehta@network18online.com