"A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate.”
When a corporation needs funds, one way is to arrange funds is from banks or borrow money. But a generally less expensive way is to issue (sell) bonds. The organisation agrees to pay some interest rate on the bonds and further agree to redeem the bonds (i.e., buy them back) at some time in the future (the redemption date).
Foreign Currency Convertible Bond is a type of convertible bond issued in a currency different than the issuer's domestic currency.
It is a quasi-debt instrument which are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock.
Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.
An Indian company or a body corporate, created by an Act of Parliament may issue FCCBs not exceeding US $ 500 million in any one financial year to a person resident outside India under the automatic route, without the approval from Government or the Reserve Bank.
Promoters or issuers of foreign currency convertible bonds (FCCBs) may be allowed to buy back the bonds if they go in for prepayment.
Also, promoters are likely to be allowed to utilise the unused portion of the foreign currency-denominated borrowings parked overseas. This could also be utilised to meet the redemption pressure after the bonds mature.
It has now been decided to permit premature buyback of FCCBs. For the buyback of FCCBs out of rupee resources the RBI has fixed a minimum discount of 25% on the book value. The amount of the buyback is limited to US $50 mn of the redemption value per company wherein this window will be kept open till March 09.
To Buyback FCCB out of Foreign Currency minimum discount of 15% on the book value.
FOR R-COM Reliance Communication would most likely be the first company to announce buy back of its Foreign Currency Convertible Bonds (FCCBs) R-Com had issued zero-coupon FCCBs in February 2007, to raise USD 1 billion. The bonds are now trading at a 35% discount to the issue price, meaning, its bonds worth has now come down to US$650 million RCom, as it currently has over Rs.100 billion in cash reserves, which also includes about US$ 600 million worth of investments in mutual funds overseas This move to buy back by Rcom is good, as it would help the company reduce its liability and also bring down its forex exposure.
Tata Motors has cumulative outstanding FCCBs worth Rs.44.87bn.
Compared to current market price of Rs.152 the FCCB’s is at a 85% discount compared to the conversion price. Considering the large capex program planned by the company and the downturn in automobile industry, shut down of production facilities, likely increase in borrowings to fund JLR, it could face difficulties in terms of cash flow management in near term future and is unlikely to opt for pre-payment option for FCCBs.
Two to three years back Indian markets were on high growth and FCCBs became popular for raising funds from overseas market. With the fall in the market, many FCCBs has gone down, which means no money and more problem in the market.
Issuing companies will now have to search for resources to repay the debt along with redemption period whenever it matures. For this companies will seek to fresh borrowings, with high interest rates, which in turn would impact their profitability.Another option, which companies have is to reset the conversion clause, to bring it closer to reality.