Foreign currency convertible bonds (FCCBs) worth Rs 220-240 billion are unlikely to get converted to equity shares : CRISIL Research
May 23, 2011:
Foreign currency convertible bonds (FCCBs) worth around Rs 315 billion, issued by Indian
corporates, are nearing their maturities by March 2013. Of these, FCCBs worth Rs 220-240 billion
may not get converted into equity shares, as the current stock prices of issuing companies are
significantly below their conversion prices. Companies have the option to either redeem FCCBs or
reset their conversion price downwards to make conversion attractive.
An analysis by CRISIL Research indicates that bonds worth Rs 200-220 billion could be either
redeemed 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.
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.
On the other hand, companies with outstanding FCCBs worth Rs 15-20 billion, which have a strained
balance sheet with a net gearing of more than 2 times, weak financial performance and low promoter
holding, will find it tough to meet their repayment obligations.
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, after the decline seen post the global financial crisis in 2008,
the share prices of many of these companies with outstanding FCCBs have continued to remain
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