Foreign Currency Convertible Bond

FCCB

ITM ( Ca pi tal Ma rket )

 Convertible Bond
It is a typ e o f bond that the hol der can con vert in to shares
of com mon stock in the is suing comp any or cas h of equal
value, at an ag ree d-u pon pr ice. I t is a hyb ri d secu rit y with
debt- and equ ity-l ik e f ea tu res .

Key Benefits
• Low coup on ra te, the in stru ment carri es ad di tio nal value
th rou gh the op tion to con vert th e bond to stock, and th ereb y
partici pate i n fu rth er grow th in th e comp any's equity val ue.

• From th e issuer's perspectiv e, th e k ey benefit of rais ing

mon ey by sell ing conv ertib le bon ds is a r educed cas h
interes t pay me nt.

• Benefit of redu ce d interes t payments , th e value of

sharehol der's eq ui ty i s redu ce d due to the stock dilu tion
ex pect ed when bo nd ho ld ers conv ert th eir bond s i nt o n ew
shares.

ITM ( Ca pi tal Ma rket )

 ABC of FCCB
• Al so referred as FCCN Foreig n Cur re ncy Con verti ble Note s

• Foreig n Cur re ncy Con verti ble Bon ds (FCCB ) are d ebt
instrum ents is sued in a cur re ncy dif ferent than th e issuer’s
domes ti c cu rrency with an op tion to con vert th em in
common shares of th e i ssuer com pany .

• It’s a qu as i debt ins trum ent t o r aise foreig n curren cy fu nd s

at attractiv e r ate.

• Acts lik e a bond by maki ng reg ul ar cou pon and pri nci pal
paymen ts and al so gi ves th e bon dh ol der an op tion to con vert
th e bond into stock .

• Inv es tors rece ive the safety of guarantee d payments on the

bon d and are also ab le to tak e adv antag e of an y larg e
pri ce app reciatio n in th e comp any's stock

ITM ( Ca pi tal Ma rket )

 Guide line s
• Company can issue FCCB only upto value of USD 500 million in a
single year. However issue of FCCBs exceeding USD 500 mn subject
to approval of RBI.

• Should be listed on BSE and NSE and minimum net worth during the
previous three years should not be less than 500 crore

• Minimum average maturity shall be 3 years for borrowing upto US

$20 million and 5 years in case it exceeds US $20 million.

• Cab be raised through two route Automatic and RBI approval The
automatic route is available to real sector i.e. Industrial sector,
specially infrastructure sector-in India, while all other sectors have to
take RBI approval
????How Different
Equ ity Debt
• Immed iate Eq ui ty • High interest rates in borrowings
dilu ti on • High coupon in bonds
• Div idend Distri bu tion • ECB limited to capital goods, overseas
acquisitions, Capacity augmentation

FCCB

1.Low cou pon inter es t com pa re to debt

2. No immedi ate di lu tion of equ ity
3. No ca sh pa ym ent in good ma rk et con di tion
4. All tr ansact ion s in forei gn curren cy

ITM ( Ca pi tal Ma rket )

 Structure of 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 at
 issues equity at pre decided price (Rs 125) 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
maturity if traded at discount
????Who gains Win-WinWin-Lose

Benefits to Issuer Benefits to Investor

FCCB can be raised in a month usually Help to diversify their portfolio

and thus takes lesser time.

Low overseas interest rate Find better option to invest in emerging

markets like India

Credit rating is not mandatory, since If share price goes up benefit from the
bonds are issued by top corporate capital appreciation
having excellent rack record.

Low cost means of financing Assured of fixed return and capital

appreciation.
????WHY FCCB

•FCCB become a pop ul ar tool for raising fu nds f rom ov erse as

mark et .

•Hig h rid ing in th e mark et res ili ence seen in th e second ary
mark ets .

•The tota l amo un t r aised f rom FCCB s dur in g th e las t t hree

years sta rtin g 2006 on ward s amoun te d to $15bn .

• Comp ani es went in for the FCCB ro ute to fun d their

ex pans ion /ac quisiti on p lans.

•Sim pl y bec au se shorter lead ti mes associate d with th e

proce ss as we ll as fo r the fact th at comp ani es gain ed
ex pos ure in to a gl ob al inv estor bas e.
Wockhardt’s Big Plans
• Board meeting of Q2, 2004 - Wockhardt launched its maiden FCCB issue
of US $ 100 Mn with a Greenshoe option of US $10 Mn

• 5 year, zero coupon bond with a 50 per cent premium

Purpose:
• To expand reach in Europe through the inorganic route –acquired two
companies in Europe and established its own sales and marketing
organization in the US

• Setup of a SEZ in the Shendra Industrial Park near Aurangabad,

Maharashtra, which will house the company’s R&D and manufacturing
facilities

• Targeted a big-ticket acquisition in end 2006 - early bidder for

betapharm, a generic drug firm in Germany which was later acquired by
Dr Reddy’s Laboratories Limited

• Acquired 3 major companies for $453 million in the last 30 months

(Ireland based Pinewood Laboratories for $150 million, Negma
Laboratories of France for $265 million and Morton Grove
Pharmaceuticals of US for $38 million)`
!!!!!Have a look at scenario
BIG B’s Of FCCB

Conversio
n
price at Share price
Maturity Issue Size maturity as on
Company Period (Mn) (Rs) Sept 18,2009

Aurbindo Pharma May,2011 150 USD 1014 677.05

Bajaj Hindusthan Feb, 2011 120 USD 465 181.15

Moser Baer Jun, 2012 75 USD 546 91.40

Wockhardt Sept,2009 110 USD 486 174.35

Ranbaxy Mar,2011 440 USD 716 360.10

Reliance
Communication May,2011 500 USD 476 306.60

Tata Chemicals Jan, 2010 150 USD 231 268.80

Tata Motors Jun, 2012 450 USD 961 598.95

????? What to do ?????
In tod ay’s f inanci al do wnturn …

• Con vers ion p ri ce of FCCBs h as gone severa l tim es hig her

th an their curren t mark et p ri ce .

• pri ce s of In dian shares have fall en sharp ly com pared to th e

conv ers ion pri ce of th e b on ds in to equi ty .

• Inv es tors disin te res ted i n con verti ng th eir bond s into
equ ity as they do no t see o pp ortu ni ty to con vert such bond s
into eq ui ties .

• Rupee at l ow , hig h IN R pay me nt awa iti ng

• Res et the conv ersion clause , to br in g it clos er to rea lity -

Potenti al dil uti on of share hol din gs
 Buyback Of FCCB
• FCCB s, most ly r aised th rou gh bond s, have s uffered s harp
eros ion in p ri ce s.
According to an investment banker,
• Buyb ac k is a chea
“now manyper op tion
of these as promoters
bonds wilsteep
are trading at l have to pay the
ful l cou pon (i nte rest rate on the face value) an d pri nci pal
50% discounts.
amou nt if th ey wait for the bonds to mat ure.
So, if a seller is available then you can buy FCCB
bonds worth $10 million for only $5 million".
• Prom oters or i ssuers of foreig n cu rrency con verti ble bo nd s
(FCCB s) may be al low ed to bu y b ac k the bond s if th ey go in
for pre paym ent.

• Accord ing to RBI ann ou nced in D ec emb er, a comp any can buy
bac k FCCB s out of r up ee res ou rce s if th ere is a mi ni mu m
discoun t of 25 per cent on t he book valu e.

• Th e res our ce s for the buy back h ave to be dr awn from the
comp any ’s intern al accru als.
 Guide line s
• Th e RBI permi tted Indi an comp anies to buy back FCC Bs up
to max imu m $50 mil lion to 100 mil li on u nd er th e app rov al
route, if i t is d on e at a mi ni mu m dis cou nt of 25% on the
book v alu e.
• Ma ndated t hat t he fu nd s used for the buy back woul d h ave
to be ou t of ex isti ng foreign cu rre ncy fun ds held ei ther in
India.
• It coul d also be ou t of fres h ECB , rais ed i n con fo rmity with
prev alent ECB norm s.
• Th e FCCB s bought bac k or repu rch ased fro m the h ol ders
mu st be cancell ed and shoul d n ot be re-iss ued or re- sold .
• Th e buy back shou ld not have any eff ec t on the bond hol ders
not op ting for th e buy back or o n the no n-p artici pati ng bond
hold ers of comp an ies opti ng for th e buy back .
• Prep ayment of FC CB is perm itted upto US $200 Milli on
subje ct to comp li ance of min imum averag e matur ity
perio d.For hig her prep ayment amoun t, RBI ap prov al i s
need ed.
 What spee ds up Mah indr a &
Mah indr a F CC B buyback
• M&M had comp leted a $ 200 mil lion F CCB i ss ue i n 2006 invest ors from Euro pe
and Asi a.

• Wi th ma turit y of 5 -y ea r p lus on e d ay.

• Fac e val ue of $ 100,0 00 per bond , and an ini tial co nversi on pri ce of Rs 9 22.0 4
per sha re.

• M&M exp ect ed bond -hol ders to conv ert these bond s int o e quit y. But wit h t he
downt urn in the g lob al eq uit y mark et, these b ond s are no w pri ced muc h
hi gher than t he co mpany 's st ock pric e.

• If not co nvert ed , wo ul d have t o rep ay the deb t a t t he time of mat uri ty, whic h
wo ul d increase the fina nci al burd en of the cash-st rap ped fi rm s.

• M&M has re purchased 65 zero coup on FC CBs due 2011 ,a gg re gat ing to $6 .5
mi ll ion
 A sob story today….

• Indian comp anies now faci ng some hars h re al ity . As mos t

of the bo nd s are up for redemp ti on in th e next year whi ch
cou ld hav e a n eg ati ve im pact o n the ca pita l stru ct ure of
th ese comp ani es.

• A basket of aroun d 1 56 comp ani es which h ad issued FCCB s

betw ee n 2006 to 2008 are lik ely to tak e adv antag e of t hi s
meas ure ann oun ce d by th e RBI .

• Larg e ru pee d ep re ci ation and th e s harp stoc k price fall s

whi ch have crea ted larg e los ses on both FCC Bs and ECBs .

• For rep ayin g thes e FCCBs lik ely to in vol ve fre sh debt fu nds
at hi gher rate s whi ch coul d fu rth er p ut strain o n the ca sh
flo ws goin g ah ead .

ITM ( Ca pi tal Ma rket )

 FC CB

A TICKI NG TIM E BO MB
(Exp lode if fail to pa y)
Venus Remedies – ma rk et pri ce of
Venus wa s
Indian company is slapped with a winding-up petition
Rs.2 51much
bel ow the
• Ven us Re med ies, Ch andig arh -bas ed comp an y defaul te d on a
con ve rs ion
foreig n currency co nverti ble bond (FCC B) issue.
pri ce of Rs 437

• New York -b ase d DE Sh aw an d C hi cag o-b ased Ci tad el

Inves tment sub scri bed to a $12-mi ll ion FCCB is sue of Venu s
But W hy??? ??
Re medies in May 2 006 whi ch is ca me up for re demp tion on
Ma y 2 thi s yea r, b ut co mpan y failed to pay th e inves tors .

• Sue again st — def aulted to h on or FCCB i nv es tors . Formal

reques t to a cou rt for th e comp uls ory liq uid ation of a comp an y
In ve stor s did
— by FCCB in ves tors.
not wa nt to
con vert it into
• Will ful Don
def’tault b y com pany -Cri sil had in Febr uary share
wa nt to
2009s.
as signed be geA t-rati
undengr to Venu s Remedi es on its debt facil ities ,
ci tin g the
comffresortab le fi nan cial ri sk p ro fi le ma rked b y health y size
h debt
of net worth and stron g debt protect ion i ndi ca tors.
Another way Out……. CREDIT- LINKED NOTES
• CLN is a credit derivative linked to foreign currency convertible
bonds (FCCBs).

• Protection from Credit Risk.

• Indian bank overseas wings bank buys CLN.

• No Default by FCCB issuer the bank makes money on this.

• Syndicating foreign banks exit after offloading the CLN in the

secondary market.

• Lapped up by Indian banks as they earn a coupon of 50-60 basis

point.
Thank You