Indian companies will have to find $ 4.4 billion (Rs 24,200 crore) to payback the ‘foreign currency convertible bond’ holders in the current financial year. As they pay back (or attempt to restructure) they are likely to be struck by a realisation that FCCBs are not any cheap source of financing.

An analysis of Edelweiss Research has shown that the effective cost of borrowing through FCCBs that are (maturing this year) works out to 12.2 per cent. “In our opinion this would have been the cost had the companies opted for domestic debt,” says Edelweiss.

Listlessness in equity markets, higher conversion price along with pre-fixed redemption premium and a 36 per cent depreciation in the Indian rupee against the US dollar have all diminished the likelihood of the bondholders opting to convert the instruments into equity shares.

As on May 28, 2012, there were 34 BSE 500 companies that had outstanding FCCBs of $ 6 billion. “In our estimate, of the above, the likelihood of conversion in the case of 28 companies looks remote,” says Edelweiss.

For 20 of these companies, the bonds will need to be redeemed in the current financial year. Edelweiss calculates the total outflow for these to be $ 4.4 billion.

Loss due to currency fluctuation put at Rs 8,930 crore.

The Indian rupee depreciated 36 per cent against the US dollar in the last five years. As much as 93 per cent of FCCBs maturing in the current year were raised when the rupee was quoting less than Rs 46 to a dollar.

Now, when these Indian companies have to pay back in dollars, they have to shell out more rupees to raise the dollar. The accounting practice is to mark-to-market the depreciation, in other words, treat any depreciation as a loss. This MTM loss is a notional loss, except in the year the bondholders have to be paid back.

Edelweiss calculates that the MTN losses of all the 34 companies that had FCCB outstandings as on May 28, 2012, to be Rs 8,930 crore.

On Thursday, Standard & Poor said that 21 Indian companies that face FCCB redemptions in the current year are likely to default.

Given this situation, will these companies seek 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 companies may opt for lowering the conversion price. If they do that, the consequence would be bloating of equity base. Correspondingly, the promoters’ holding will come down significantly, Edelweiss says.

mramesh@thehindu.co.in

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