Fccb hitu
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  • For example, John owns a convertible bond worth $1,000 from XYZ Corp. If the bond can be converted into 100 shares of XYZ, John will most likely exercise the conversion option only when XYZ's share price exceeds $10. Read more: http://www.investopedia.com/terms/c/conversion.asp#ixzz25ZhcCPTA

Fccb hitu Presentation Transcript

  • 1. Foreign Currency Convertible Bonds: Pros and Cons of financing through FCCB Hitesh Gupta 2011E12 5th of Sep 2012
  • 2. Flow of PresentationIntroduction to FCCBPros and Cons of FCCB and nuances of usageRegulatory MechanismOptions post issue
  • 3. FCCB• Foreign Currency Convertible Bond (FCCB) - Mix between debt and equity instruments• Convertible bond issued in a currency different than the issuers domestic currency• A quasi-debt instrument attractive to both investors and issuers• Acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock• Generally available at US$ 1000 each• Eligible borrowers under approval route include Financial Institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM• Banks are considered on a case by case basis
  • 4. Anatomy of an FCCB… Capital in $ Issuer of FCCBs Lender of money FCCBs 29-Apr-2009 29-Apr-2009  raises money in dollars  receives FCCBs  sets conversion price at premium (say Rs 125)  can trade FCCBs if in liquidity  maturity period between 3-5 years crunchIf markets are good… Equity at conversion price Issuer of FCCBs Lender of money FCCBs returned 29-Apr-2014 29-Apr-2014  no need to pay in cash  makes windfall profit by selling equity  issues equity at pre decided price (Rs 125) at prevailing market prices (say Rs 200)  equity dilutionIf markets are bad… Capital in $ Issuer of FCCBs Lender of money FCCBs returned 29-Apr-2014 29-Apr-2014  redeem bonds at par value  redeem FCCBs at par value  huge requirement of cash  principal investment comes back with  buy back from market before small returns 4 maturity if traded at discount
  • 5. Pros ConsPositive impact on the cash flow of the Difficult to get the subscription for FCCBs company in a bear marketInterest rates/Coupon Rates are low EPS goes down when the FCCBs are compared to debt converted; dilute the ownership When interest rates seem to be going Does not dilute the ownership down , FCCBs are not preferred as equity immediately is costlier than debtNormally carry fewer bond covenants Exchange rate risk
  • 6. It’s different!Equity Debt FCCB• Immediate equity dilution • Low coupon/interest• Dividend distribution • High interest rates in compared to debt borrowing • No immediate dilution of • High coupon in Bonds equity • ECB limited to Capital • No cash payment in good goods, capacity market conditions augmentation, overseas • All transactions in foreign acquisitions currency 6
  • 7. Regulatory Mechanism• Permitted End Uses – For investment (e.g. import of capital goods) – Implementation of new projects – Modernization/expansion of existing production units in: – For Overseas direct investment in Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) – For the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment program of PSU shares• Non-Permitted End Uses – On-lending or investment in capital market – Acquiring a company (or a part thereof) in India by a corporate – For working capital – For general corporate purpose – For repayment of existing Rupee loans
  • 8. Various Options Post Issue• Investors convert their FCCBs into Equity – When the conversion price is lower than the market price• If they don’t convert: – Repayment through existing cash, cash equivalents and operating cash flows: – Refinancing of debt: – Reset the conversion price to bring it closer to the current market price – Buyback or prepayment For example: Jubilant Life Sciences had raised more than USD $275 m by selling FCCBs overseas. Conversion price for bonds maturing on May 2010 was fixed at Rs 377.9, and for Those maturing on May 2011 was fixed at Rs 588.9. However, stock price tanked to 150. As a result, Jubilant repurchased FCCBs worth
  • 9. EFFECT ON EPS Exercise of Conversion option leads to increase in number of outstanding shares. Basic EPS (Net Income – Preference Dividend)/(Weighted avg. no. of shares outstanding) Convertible bonds increase the number of shares outstanding and dilute the EPS
  • 10. INDIAN SCENARIO INDIAN SCENARIO
  • 11. Industry Wise..
  • 12. Points to ponder Increase (from $50M to $100M) in limit of premature buy-back of FCCBs using Indian currency - Very less impact because of unavailability of sellers and a scarcity of funds with Indian companies. Another option is to buy back those bonds using foreign currency reserves or through fresh borrowing in foreign currency (No limit) - But raising funds in foreign markets at this moment is a big challenge (Global credit crunch). So it benefits only those companies who have enough cash in their internal accruals - But there are not many companies 12
  • 13. Case of HCC• Hindustan Construction Company has paid $133.03 million to bond holders towards redemption of the entire outstanding FCCBs.• Repayment funded out of internal resources of the company.• HCC Chairman had earlier said that, if the FCCBs do not get converted, the company will repay investors with sufficient internal accruals and cash available• To access cheap foreign currency debt, many mid-cap companies like HCC issued FCCBs in 2005-06 and provided their holders the option to convert the bonds into equity within the pre-determined period and price.
  • 14. Parting thought …"Some debts are fun when you are acquiring them, but none are fun when you set about retiring them”~ Ogden Nash 14
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