[T.S.R:17428] FCCBs-Boon Or Bane?

FCCB - Boon or Bane

 

The Indian Context

Foreign currency convertible bonds (FCCBs) worth Rs 315 billion ($7 billion) are due for redemption over the next 2 years for S&P CNX 500 companies.

 

Of these, FCCBs worth Rs 220-240 billion (almost 80% of the total outstanding FCCB's) may not get converted into equity shares or see a downward revision in their conversion price, based on the analysis of the capital structure, promoter holding, parent company support, profitability and cash flows., as the current stock prices of issuing companies are significantly below their conversion prices.

 

Implications

Refinancing FCCBs with fresh debt will increase the interest burden of companies as most of the FCCBs carry very low or zero coupon rate. Companies that revise their conversion price downwards could witness a sharp dilution in their equity, which will lead to further decline in their share prices. This would further stretch the company's balance sheet.

 

So the only solution to the investors is to redeem and for company is to pay them by refinancing themselves.

 

A large number of FCCBs were issued during 2006 to 2008 period when the stock markets were buoyant and the conversion prices were set at a steep premium to the then prevailing prices. Although the stock markets have largely recovered form the 2008 levels, though the stock prices are still under pressure due to volatile markets

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