100 Companies in Trouble as FCCBs Date Nears Maturity - Business Today

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100 companies in trouble as FCCBs date nearsmaturity Shweta Punj June 15, 2011

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Flight of FCCBs

Foreign currency convertible

bonds provide for low -cost debt

In an ideal market, conversion

occurs at a premium

They lead to low er dilution

FCCB MANIA

Why companies bought FCCBs

The gold-leafed dome of the new ly-opened Leela Palace Kempinski in New Delhi gleams in the sunlight.

The interior, lit w ith murano chandeliers f rom Italy, promises a palatial experience for those seeking to

experience royal Indian hospitality.

While the Leela Group's new est property has been especially designed to attract a foreign clientele, its

Chief Financial Off icer 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 curre ncy 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 w icket: its debt is nearly double -1.85 times - its equity. Its scrip istrading at half the conversion price and $42 million w orth of FCCBs w ill have to be redeemed by Apr il

next year.

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 w ould get converted, unfortunately share prices

have not moved, especially in the hospitality sector. Two years

back, many investors w ere selling FCCBs at low prices… w e

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, w ill 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 w hich took the FCCB route aggress ively during the 2006/2008

bull run to raise funds, now find it is payback time. According to a Crisil report, bonds w orth 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 w as 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."

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, w hich come up for maturity in March

2012. At a conversion price of Rs 661, and the stock currently

trading at Rs 93, RCOM w ill have to go for redemption.

The stock hit a 52-w eek high of Rs 204 in June 2010, but that

too is not even half of the conversion price the company had

borrow ed at. An RCOM spokesperson declined to comment on the company's FCCB redemption plan.



Anil Ambani's R COMraised more than Dollar 1

billion through FCCBs in

2007, which will come up

f or redemption in March

2012.

But Thunuguntla, who has been tracking the company, says: "RCOM w ill be hit by combonegatives.

Investors w ill w ant redemption.

On top of that telecom stocks have taken a beating. The big question is: How w ill 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 draw n Rs 8,700 crore from China Development Bank. The largest loan ever

between the two countries w ill be used to ref inance the company's short term borrowings. A company

release relating to the loan said: "The drawn down amount w ill be used to ref inance RCOM's short termrupee borrow ings resulting in substantial savings in its interest cost, apart f rom extending RCOM's debt

maturity profile."

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

prof its 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 w atchers. In 2009,

US-based hedge funds DE Shaw and Citadel Investment Group f iled a

w inding-up petition against the Chandigarh-based Venus Remedies after the

company defaulted on an FCCB issue.

A w inding-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 convers ion price, and the company failed to pay the investors

w hen it came up for redemption.

Af ter 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 w ould pay a part of the

outstanding FCCB, and the FCCB holders w ould w ithdraw the w inding-up petition.

The case of Venus Remedies stands out in the short history of FCCBs in India. FCCBs as an investmentinstrument 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

w ill w ork 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 aw ay, the company has started buying back the bonds. It redeemed $50 million w orth of

bonds in 2009 and another $2 million worth in 2010.

Ravi Kumar Jain, Chief Financial Officer at the packaging major, says: " We w ere expecting the share

prices to go up, but with the global economic crisis, FCCB investors w ere 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 w ind turbine maker has had the wind taken out of its sails. Suzlon

raised $300 million through FCCBs in 2007, at a convers ion 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, dow n 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 w ere higher than domestic

prices and FCCBs w ere hot. With the euro crisis, and the market correction deeper than anticipated,

companies are exploring other w ays 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 c rore through external

commercial borrow ings, or ECBs, to redeem FCCBs. The pharma company w as f inding it diff icult to

raise debt at competitive rates in India. Still, those advising companies on fund raising say Indian banks

w ill be w ary of lending in such cases, since, as Thunuguntla points out, "Purpose and amount, both arechallenging."

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 borrow ings could come at

an interest rate of one to five per cent over the London Interbank Offered Rate - the world's most

w idely 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 w ill get more stretched."

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100 Companies in Trouble as FCCBs Date Nears Maturity - Business Today