FCCBs - LOOMING BLACK HOLE

By Ruma Dubey

Today, Jai Prakash Associates is amongst the biggest losers. Yesterday, Tulip Tele was the big loser. And both have one common factor – FCCBs which are due for repayment.

JP Associates is today down deep in the red as investors get wary over the mounting debt in the company. As at 31st March 2012, consolidated debt was at Rs.50,300 crore as against Rs.37,500 crore at end of FY11. Its current maturities of long term debt stands at Rs. 7,800 crore, which also includes $534 million FCCBs which are due in Sept 2012. To that off, the company is now raising another $150 via one more FCCB, which is to be used to pay back current FCCB.

Yesterday, Tulip Telecom was down as concerns were raised over the company’s FCCB repayment obligations. The company needs to payback $ 145 million to its bondholders and the deadline for that fell on August 26. News is that the company, till date, has arranged for $ 72 million and has received firm commitments of $ 50 million towards subscription of a fresh issue of foreign currency convertible bonds. But what about the gap?

Marketmen have started to get wary with the word FCCB and it is becoming a big bad word on the street. Sintex Industries is also down today as there has been looming worry over its $225 million of FCCB repayment, deadline being March 2013 at a trigger price of Rs.247. 

FCCBs are essentially loans, taken from abroad where in lieu of debt, the company promises to either convert the debt into equity or agrees to repay. When the markets are up and the stock price is up, it makes sense to go for equity conversion as the conversion price or the trigger price is lower than that of the quoted price on the bourse. And if the price is lower than the conversion price, the company can repay in cash which is essentially repayment of the principal amount, which is known as redemption. Companies have two options – either repay if there is enough cash flow or else it will have to borrow more to repay. So more debt to repay existing debt. Or else, default on payment. FCCB debt does not come cheap – it is usually at 12-15% at current exchange rate. So one has to pay higher interest rate and there is a double whammy if the rupee depreciates, which is what ails India Inc. A report put out by IIFL states that rupee depreciation has currently made FCCBs a more expensive option than domestic debt as it has added 700 bps to the original cost of debt. The FCCB of JP Associates had YTM of 8.1% but thanks to the rupee depreciation, it has now gone up to 15%. The conversion price at current rate of rupee is around Rs.330.

There are quite a few companies whose FCCBs are maturing this fiscal. There was a virtual deluge in 2007 when companies rushed in for FCCBs and the same deluge will be seen this fiscal as they all mature. Apart from Tulip and JP Associates there are some more companies one needs to keep a watch on.

Fitch put out an ominous report stating that this fiscal, it expects 20% of the total US $ 7 billion FCCB due for redemption this year to have an extremely high likelihood of default. Another 17% are likely to undergo restructuring (mostly maturity extensions) and rest 63% have a high likelihood of redemption.

The only good news is that this deluge of FCCB redemptions will taper off this fiscal as majority were issued in 2007. Thus 2014 and 2015 will have very low FCCB redemptions. Hopefully by then interest rates would also be down; we only have to cross this dark patch now. The time before dawn is always the darkest.