India Forex Advisors

IFA Classroom - Day 15

Dated- 5th July, 2013

FOREIGN CURRENCY CONVERTIBLE BONDS

Key Highlights:
What is FCCB ?
Trend of FCCB
Recent Complications

What is FCCB ?
A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency
different than the issuer's domestic currency. In other words, the money being raised by the
issuing company is in the form of a foreign currency.
Advantages

INDIA FOREX ADVISORS

The issuer pays the interest and the principal at a lower interest rate.
More importantly, it can convert the bond into equities.
The issuing company gets the benefit of raising money form the foreign markets, thus
opening another source of financing.

Disadvantages

The exchange risk is more in FCCBs as interest on bond would be payable in foreign
currency. FCCBs means the creation of more debt and a forex outage in terms of interest
which is in foreign exchange.
In case of convertible bond the interest rate is low (around 3 to 4 per cent) but there is
exchange risk on interest as well as principal if the bonds are not converted into equity.
If the stock price plummets, investors will not go for conversion but redemption. So,
companies have to refinance to fulfill the redemption promise which can hit earnings.
It will remain as debt in the balance sheet until conversion.

It is a double whammy for the FCCB issuing companies because the weak rupee means not only
will the companies have to repay the loans, but there will be an added cost because of the weak
rupee. The company will have to provide for the currency loss in its profit & loss statement.

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Tel 022-40481400. Fax +91(0) 22 40481411 Email: admin@indiaforex.in

For more analysis visit: www.indiaforex.in

India Forex Advisors

IFA Classroom - Day 15
Dated- 5th July, 2013

FOREIGN CURRENCY CONVERTIBLE BONDS

Trend of FCCB
For companies, FCCBs gave them access to funds at cheaper rates, given the fact that many of
these were zero coupon bonds with a yield-to-maturity structure, meaning the company would
have to make large-scale payments only when the bonds were redeemed. Also, the interest rates
were much lower than that of normal debt.
The given boom in the markets and rising share prices, the markets assumed that a larger number
of bondholders would choose to convert their bonds into shares eventually. The company could
also then benefit from the lack of outflows from their reserves.
Recent Complications
The current environment of risk aversion and depreciation of the Indian rupee has complicated
the refinancing challenges faced by Indian corporates with regard to their foreign currency
convertible bonds (FCCBs).
FCCBs raised in pre-crisis years at zero coupon or very low coupon bonds will need to be
refinanced through domestic sources at the higher interest rates prevailing currently.

INDIA FOREX ADVISORS

With the slowdown and stocks trading at prices below the conversion price, the chances of
bondholders exercising conversion option became minimal.
Recently we saw a leading pharma company defaulting on its FCCB repayment and depreciating
rupee was one of the factors behind the default.
There are 47 companies with outstanding FCCBs worth $4.7 billion. FCCBs of a dozen
companies are set to mature next year. The largest FCCB dues are of Tata Steel - $546.94
million due for maturity in November 2014, Sterlite Industries has $500 million FCCBs due in
October 2014, while Sesa Goa has $216.8 million FCCBs, also due in October.
Recent Developments
RBI has allowed companies to prepay or buy back these bonds to prevent further losses due to
rupee depreciation. RBI typically does not allow corporates to prepay or buy back these bonds as
this would reduce the tenure of the loan and the central bank discourages short-term borrowings.
In a circular to all banks, RBI said: "Considering the developments in the global financial
markets and on a review of the aforesaid scheme, it has been decided that the existing scheme of
buyback/prepayment of FCCBs under the approval route which expired on March 31, 2013 may
be continued till December 31, 2013 and shall stand discontinued thereafter.

7th Floor- Sangita Ellipse | Sahakar Road |Vile Parle (East) | Mumbai - 57.
Tel 022-40481400. Fax +91(0) 22 40481411 Email: admin@indiaforex.in

For more analysis visit: www.indiaforex.in