: India - FCCBs turn Ugly :

18th Novemberr 2008

PSL, NBVentures, Subex Systems, Aurobindo Pharma, Orchid Chem, Hindustan Construction, Hotel Leela, Bajaj Hindustan, Ranbaxy, Tata Motors, Mahindra and Mahindra, Bharat Forge and a few others will collectively add Rs 25000 crore to their corporate debt and pay approximately Rs 3400 crore per annum as Interest costs in FY10 and onwards. Not only will EPS decline substantially, Cash Flows will be messed up, Debt-Equity Ratios substantially disturbed and Growth based on Debt getting choked. This is assuming all FCCBs get rolled over or replaced with Debt. Otherwise we might have a scenario of Corporate India joining the list of Deafulters. The bane of FCCBs It is a staggering amount and its impact too shall be staggering for corporate India.

In the last five years nearly 130 corporates have raised $ 20 bn (Rs 100,000 crore) by way of Foreign Currency Convertible Bonds. The first and second lot of FCCBs worth $ 1.8 bn & $ 2.8 bn (approximately $ 5 bn or Rs 25000 crore) come up for conversion or repayment between mid 2009 and end of CY 2010.  Atleast 15 corporates with FCCBs maturing in the near term have the underlying shares so far Out Of The Money, that they stand no conceivable chance of ever getting converted into Equity. Terms For the uninitiated, the conversion terms of FCCBs are decided at the time of issue with a kind of Put option on the FCCB, that brings in imputed interest costs should conversions not take place. This guarantees a minimum interest payment to the buyers of FCCBs.

Conversion Blues At the time of Repayment/Conversion the issuer can either refinance the whole issue and roll-over the amount or repay the amount in total. Considering the huge amount at stake, natural fears have risen about potential default by Indian corporate issuers. Wockhardt is the first large FCCB to come up for Redemption in October 2009.  This will be followed by Subex Systems, First Source, Aurobindo Pharma, Orchid Chemicals, Hindustan Construction company, Hotel Leela, Bajaj Hindustan, Jubilant Organosys, Tata Motors, Ranbaxy, Mahindra & Mahindra, PSL and Bharat Forge. Financial Impact The FCCBs issued by these corporates are so Deep Out Of The Money, that on one hand conversion will not happen and second in comparison to the company size and its cash flows the impact of Redemption will be massive.

These corporates face major cash flow issues now, and high liquidity risks once FCCBs come up for redemption. Even assuming FCCBs are replaced with Rupee Debt provided by Indian Banks, the financial impact on company bottomlines will be Rs 3400 crore in Interest outgo (13.5 per cent annual interest payment on the Rs 25000 crore worth of FCCBs maturing in 2009-2010).  Investors would note Accounting Standard disclosures in vogue only allow FCCB issuers to consider possible dilution of Earnings per share on account of additional Equity to be issued, and have no provision for Plan B-a replacement of FCCB with Rupee Borrowings. The above referred 20 issuers will collectively lose Rs 3400 crore per annum on Interest costs alone and most of these concerns will not report profits from FY10 onwards but losses. Worst While large players Tata Motors and Mahindra may see earnings decline of 10 per cent and may get roll-overs or replacement of FCCBs by Debt, their Book Value would decline and Debt: Equity ratio would be negatively altered. With the cheap financing window closed, the FCCB cycle is no longer available to Indian corporates for growth. It is simple to state that with PLRs at 13.5 to 14 per cent, few Indian corporates living on borrowed money will find easy going in the months to come. 

From :
www.marketbhavishya.com

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