3. FCCB
• Foreign Currency Convertible Bond (FCCB) - Mix
between debt and equity instruments
• Convertible bond issued in a currency different than the issuer's 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 crunch
If 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 dilution
If 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 Cons
Positive impact on the cash flow of the Difficult to get the subscription for FCCBs
company in a bear market
Interest 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 debt
Normally 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
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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
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
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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
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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