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FCCB not a cheap supply of financing
Indian companies will have to find $ 4.4 billion (Rs 24,[link widoczny dla zalogowanych],200 crore) to payback the currency convertible bond holders in the present financial year. As they repay (or make an effort to restructure) they're likely to be struck by a realisation that FCCBs are not any cheap supply of financing.
An analysis of Edelweiss Research has revealed the effective price of borrowing through FCCBs that are (maturing this season) calculates to 12.2 percent. our opinion this would have been the cost had the businesses chosen domestic debt, says Edelweiss.
Listlessness in equity markets, higher conversion price together with pre-fixed redemption premium along with a 36 percent depreciation in the Indian rupee against the US dollar have all diminished the probability of the bondholders opting to transform the instruments into equity shares.
As on May 28, 2012, there have been 34 BSE 500 companies that had outstanding FCCBs of $ 6 billion. our estimate,[link widoczny dla zalogowanych], of the above,[link widoczny dla zalogowanych], the likelihood of conversion in the case of 28 companies looks remote, says Edelweiss.
For 20 of those companies, the bonds will have to be redeemed in the current financial year. Edelweiss calculates the entire outflow for these to become $ 4.4 billion.
Loss due to currency fluctuation put at Rs 8,930 crore.
The Indian rupee depreciated 36 percent from the US dollar within the last five years,[link widoczny dla zalogowanych]. As much as 93 per cent of FCCBs maturing in the current year were raised when the rupee was quoting under Rs 46 to some dollar.
Now, when these Indian companies have to pay in dollars,[link widoczny dla zalogowanych], they need to spend more rupees to raise the dollar. The accounting practice would be to mark-to-market the depreciation,[link widoczny dla zalogowanych], quite simply, treat any depreciation as a loss. This MTM loss is really a notional loss,[link widoczny dla zalogowanych], except around the bondholders need to be repaid.
Edelweiss calculates the MTN losses of all the 34 firms that had FCCB outstandings as on May 28, 2012, to be Rs 8,930 crore.
On Thursday,[link widoczny dla zalogowanych], Standard Poor asserted 21 Indian firms that face FCCB redemptions in the current year are likely to default.
Given this situation,[link widoczny dla zalogowanych], will these businesses aim to raise loans to payback the bondholders? Possible, but Edelweiss says that securing refinancing where the post-funding debt-equity ratio would exceed 1.5 would be difficult.
These businesses may opt for decreasing the conversion price. When they do that, the consequence could be bloating of equity base. Correspondingly, the promoters holding will come down significantly,[link widoczny dla zalogowanych], Edelweiss says.
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