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kulman
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Joined: 02/Sep/2006
Location: India
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   Topic: FCCBs: The impact +ve or -ve?
Posted: 04/Apr/2007 at 9:50am |
| With the stock market having come off sharply, companies, which raised funds through foreign currency convertible bonds (FCCBs) in 2005 and 2006, suddenly find that their current stock price is way below the conversion price or the price at which the bonds can be converted into equity. In some instances, the prevailing market price is less than half the conversion price. |
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| While in most cases, there is considerable time —-at least three to four years, during which these bonds can be converted — it remains to be seen whether the markets will rally hard enough for those prices to be reached once again. |
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What is more worrying is that several of these companies have not made adequate provisions for the debt they have raised. In other words, they have not taken care to set aside funds to repay the bonds with interest in the event that the conversion does not take place.
| WITHERING HEIGHTS |
| Company |
Amount |
YTM(%) |
Conversion
Price (Rs) |
Current
Price(Rs) |
| Adlabs Films |
84 mn euro |
4 |
543.42 |
395 |
| GHCL |
$80.5 mn |
1.00 |
197.27 |
154 |
| Hikal |
$12 mn |
6.25 |
745.00 |
375 |
| India Cements |
$75 mn |
7.95 |
305.57 |
154 |
| Punj Lloyd |
$125 mn |
4.65 |
273.00 |
154 |
| Ranbaxy |
$440 mn |
4.80 |
716.32 |
345 |
| Sakthi |
$20 mn |
8.00 |
276.77 |
102 |
| Sical |
$75 mn |
6.32 |
563.55 |
184 |
| Shringar |
$20 mn |
6.5/7.5 |
90 |
51 |
| Tata Motors |
$100 mn |
4.5 |
1001.39 |
681 |
| Vardhman Textiles |
$60 mn |
6 |
423.25 |
200 | |
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| A study undertaken by domestic brokerage, Anand Rathi Securities, shows that out of a sample of 78 companies, less than 20 were “in the money”. |
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| The current share price was higher than the conversion price only in the case of 20 companies. For some companies, a part conversion has taken place, meaning some investors have converted the bonds into equity. However, the amounts that have not been converted are larger. |
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| Market watchers point out that the earlier price levels, which were prevailing when the bonds were issued, were based on certain earnings expectations. With earnings expectations for corporate India being scaled down, it could take a while before share prices touch their earlier peaks. |
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Life can only be understood backwards—but it must be lived forwards
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basant
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Joined: 01/Jan/2006
Location: India
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Posted: 04/Apr/2007 at 10:13am |
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This article does not talk about the conversion date so if Adlabs FCCB are to converted a couple of years down tyhe line then there is less reason to get alarmed.
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Vivek Sukhani
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Joined: 23/Jul/2006
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Posts: 6675
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Posted: 04/Apr/2007 at 10:19am |
Some issues here....all we need to look at how will this company utilise these proceeds. If they block it in fixed assets and are at a later date asked to repay, i.e. not being converted, there will be a major problem on hands.
Also, we need to observe Re.-dollar impact.... if re.-Dollar behaves like this and if we breach major levels on the re-dollar, the impact will be very soothening if FCCBs arent converted.
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deepakralli
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Joined: 16/Jun/2007
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Posts: 6
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Posted: 19/Jun/2007 at 6:30pm |
Thanks Basantji,
Can you also throw some light on fccb issues that emerging companies come up with.
My understanding is that the fccb issue dilutes the EPS and therefore is not good for existing shareholders. Therefore, the increase in the share price that could have happened without fccb issue does not take place.
Please provide your thoughts.
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basant
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Posted: 19/Jun/2007 at 6:35pm |
FCCB is almost like free money. For example a company like GBN will do a FCCB at a PE of 100 times plus current year. This means that GBN is getting some really cheap money. Good for existing shareholders because in a 15% equity dilution the company can increase business manifold (entertainment venture etc).
SO it si all a question of at what price the shares are diluted.
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Vivek Sukhani
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Joined: 23/Jul/2006
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Posts: 6675
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Posted: 19/Jun/2007 at 11:13pm |
FCCB doesnt dilute EPS.....it will dilute EPS, once its converted into equity.
Basant Sir, its not as simple as you think it is.....the company faces the risk of the FCCB not being converted. The company doesnt have the discretion in that case....
However, can anyone throw some light on how interest on FCCB is treated in accounts....some say the entire amount is wrote off against shre premium, some say its charged to P/L....
Regards,
Vivek
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deepakralli
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Posted: 19/Jun/2007 at 11:37pm |
Thanks Basnat ji and Vivek ji, Most of the times, fccb gets converted into equity. For a company that has been making profits and have its profit growing every year. Lets say now FII wants to enter, it seems that it is easy for FII to enter thru this route. I as an investor have been sitting on it assuming that EPS is 30 now and it will grow once institutinal investors are going to come in it and raise the price to a new high.and suddenly becoz of this issue, with chances of dilution coming in it or actual dilution happening, my wait increases further. e.g. Prajay engineers could have increased to a very high value if FII's have bought from the market just like it happened in case of Geodesic for past 3-4 years.
Till the time this dilution happens, fccb appears as debt in the balance sheet as per my understanding.
and if fccb happens at a market price only, then it pains more for an investor already in the scrip for last few years.
Understand what you are trying to say that the scope of growth that can come with cheap money as it is not a money on which the company needs to pay any interest.
Thanks for your thoughts
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basant
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Posted: 19/Jun/2007 at 10:36am |
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It should be charged to P&L but unless the stock has been issued there is nothing in the premium account. But another grey area really.
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