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100 companies in trouble as FCCBs date nears maturity

100 companies in trouble as FCCBs date nears maturity

About 100 Indian companies which took the FCCB route aggressively during the 2006/2008 bull run to raise funds, now find it is payback time - bonds worth Rs 31,500 crore are coming up for redemption within the next 24 months. Stock prices of many of the issuers are far below their conversion prices.

The gold-leafed dome of the newly-opened Leela Palace Kempinski in New Delhi gleams in the sunlight. The interior, lit with murano chandeliers from Italy, promises a palatial experience for those seeking to experience royal Indian hospitality.

While the Leela Group's newest property has been especially designed to attract a foreign clientele, its Chief Financial Officer is busy staving off foreign investors.

The market capitalisation of Hotel Leela Venture has nosedived from around Rs 2,555 crore in 2007 to about Rs 1,600 crore today. It was in the summer of 2007 that the group went ahead and raised $110 million through foreign currency convertible bonds , or FCCBs, at a conversion price of Rs 72 a share. Shares of Leela Venture are currently trading at around Rs 40 each.

Leela now finds itself on a sticky wicket: its debt is nearly double -1.85 times - its equity. Its scrip is trading at half the conversion price and $42 million worth of FCCBs will have to be redeemed by April next year.

 Flight of FCCBs

The hospitality group, known for its opulence and grandeur, is Rs 3,800 crore in debt. Of the total $110 million raised through FCCBs, under pressure from investors, the group had to redeem $68 million in 2009.

Says Krishna Deshika, Chief Financial Officer, Leela Group: "We hoped the FCCBs would get converted, unfortunately share prices have not moved, especially in the hospitality sector. Two years back, many investors were selling FCCBs at low prices… we bought them back at a discount."

With a board approval in place, the group is hoping to raise around Rs 1,000 crore through a qualified institutional placement, or QIP, and fresh FCCBs. The money, says Deshika, will be used for debt reduction and redemption.

The promoters, including Captain C.K. Nair, the founder of Leela, hold 53.37 per cent in the group. "Our interest is to see that promoters continue to hold a majority stake, but let's see," says Deshika. Leela is not alone. About 100 Indian companies which took the FCCB route aggressively during the 2006/2008 bull run to raise funds, now find it is payback time. According to a Crisil report, bonds worth Rs 31,500 crore are coming up for redemption within the next 24 months. And stock prices of many of the issuers are far below their conversion prices.

"The conversion price was set according to the demand and supply dynamics at that point," says Jagannadham Thunuguntla, Head of Research at SMC Capital. "Companies took the conversion for granted. An FCCB is a double-edged sword."

Why companies bought FCCBs
  • Foreign currency convertible bonds provide for low-cost debt
  • In an ideal market, conversion occurs at a premium
  • They lead to lower dilution
Reliance Communications or RCOM, too, finds itself in a quandary. As if an investigation into its role in the 2G spectrum scam was not enough, the company had raised $1.27 billion through FCCBs in 2007, which come up for maturity in March 2012. At a conversion price of Rs 661, and the stock currently trading at Rs 93, RCOM will have to go for redemption.

The stock hit a 52-week high of Rs 204 in June 2010, but that too is not even half of the conversion price the company had borrowed at. An RCOM spokesperson declined to comment on the company's FCCB redemption plan. But Thunuguntla, who has been tracking the company, says: "RCOM will be hit by combonegatives. Investors will want redemption.

On top of that telecom stocks have taken a beating. The big question is: How will RCOM pay $1.27 billion?" What might rescue RCOM is that it is part of a behemoth - the Reliance Anil Dhirubhai Ambani Group, he adds. The flagship of the billionaire Anil Ambani 's conglomerate could get help from the group companies.

Then, RCOM has also drawn Rs 8,700 crore from China Development Bank. The largest loan ever between the two countries will be used to refinance the company's short term borrowings. A company release relating to the loan said: "The drawn down amount will be used to refinance RCOM's short term rupee borrowings resulting in substantial savings in its interest cost, apart from extending RCOM's debt maturity profile."

Anil AMbani
Anil Ambani's RCOM raised more than Dollar 1 billion through FCCBs in 2007, which will come up for redemption in March 2012.
The company also says it has received indicative offers from interested parties seeking to acquire RCOM's controlling stake in Reliance Infratel, its telecom tower unit. If the sale goes through, RCOM hopes to use the money to reduce its mounting debt. The company reported an 86 per cent drop in its profits for the January-March quarter on the back of lower customer billings. The phone services firm is in a muddle, but analysts are still slightly more optimistic about the fund-raising abilities of big boys like RCOM, than the small and mid-size companies.

Memories of Venus Remedies still worry industry watchers. In 2009, US-based hedge funds DE Shaw and Citadel Investment Group filed a winding-up petition against the Chandigarh-based Venus Remedies after the company defaulted on an FCCB issue.

A winding-up petition is filed to initiate liquidation proceedings against a company. DE Shaw and Citadel had subscribed to a $12 million FCCB issue of the company in May 2006. The share price fell below the conversion price, and the company failed to pay the investors when it came up for redemption.

After months of negotiations, and directions from Punjab and Haryana High Court, Venus Remedies and its FCCB holders reached a settlement. According to it, the company would pay a part of the outstanding FCCB, and the FCCB holders would withdraw the winding-up petition.

The case of Venus Remedies stands out in the short history of FCCBs in India. FCCBs as an investment instrument are old, but nearly 70 per cent of the FCCBs currently held by Indian companies were issued only about five years ago - during the euphoria of the bull run. No doubt the tardy Indian legal system will work as deterrent for investors who would want to consider filing a winding-up petition.

But as the maturity date nears, many companies have either already begun negotiations - usually asking for more time - or started the buyback process. Uflex Industries, a flexible packaging company, raised $85 million through FCCBs in 2007 at a conversion price of Rs 164. With the maturity date less than a year away, the company has started buying back the bonds. It redeemed $50 million worth of bonds in 2009 and another $2 million worth in 2010.

Ravi Kumar Jain, Chief Financial Officer at the packaging major, says: " We were expecting the share prices to go up, but with the global economic crisis, FCCB investors were desperate to sell, so we redeemed the bonds at a 45 per cent discount of the face value."

Adani Enterprises, the flagship of the Adani Group, decided to go for a conversion of $250 million of FCCBs in the second quarter of 2010/11, more than a year before the maturity date. "As of today, none of the FCCBs is outstanding," says a company spokesperson.

While companies such as Uflex are cautiously treading the FCCB redemption path, those like Suzlon are confident of sailing through. The wind turbine maker has had the wind taken out of its sails. Suzlon raised $300 million through FCCBs in 2007, at a conversion price of Rs 359 - later restructured to Rs 97. The bonds are set to mature in June 2012 and October 2012.

With a current debt to equity ratio of 1.36, down from 1.5, and the stock trading at about Rs 53, there is looming concern over Suzlon's plan. The green energy major reported a sharp turnaround in the March quarter, but the stock has mostly remained flat so far.

Overconfidence and exuberance might have marred the FCCB story of Indian companies. As Girish Vanvari, Executive Director, KPMG, says: "Three years ago, premiums were higher than domestic prices and FCCBs were hot. With the euro crisis, and the market correction deeper than anticipated, companies are exploring other ways to raise funds. Nobody I know is looking at FCCBs now - companies are looking at raising funds through QIPs and selling stake."

Chennai-based Orchid Chemicals & Pharmaceuticals recently raised Rs 1,500 crore through external commercial borrowings, or ECBs, to redeem FCCBs. The pharma company was finding it difficult to raise debt at competitive rates in India. Still, those advising companies on fund raising say Indian banks will be wary of lending in such cases, since, as Thunuguntla points out, "Purpose and amount, both are challenging."

More and more companies, like Orchid Chemicals, could take advantage of the recently-liberalised ECB norms. ECBs might give companies some breathing room for now, but these borrowings could come at an interest rate of one to five per cent over the London Interbank Offered Rate - the world's most widely used benchmark for shortterm interest rates.

As Thunuguntla puts it, "The ECB route is postponement of the problem, not the solution. The debt-to-equity ratio will get more stretched."

Published on: Jun 15, 2011, 12:00 AM IST
Posted by: Navneeta N, Jun 15, 2011, 12:00 AM IST