When the rupee was relatively strong, stock markets were rising, and domestic interest rates were high, companies rushed in droves to issue Foreign Currency Convertible Bonds (FCCBs). FCCBs are instruments with a mix of debt and equity. It gives bond holders the option to convert bonds into equity shares at a predetermined price. But, if the shares never reach the desired level when the bond reaches maturity, the principal is repaid just like regular debt. As of now around 59 companies face redemption of FCCBs worth US$ 7 bn in 2012 itself. But their domestic borrowing abilities are also constrained due to high costs. India's credit rating has also been recently downgraded from stable to negative by S&P, which may have a further impact on borrowing costs in the country.
Some of the companies that face redemption this year include Suzlon (US$ 540 m), GTL Infrastructure (US$ 320 m), Firstsource Solutions (US$ 240 m), 3i Infotech (US$ 130 million), etc. as per Fitch Ratings data. And the worst part is that most of these companies have had a negative run on the bourses. Thus, their share prices are nowhere close to the conversion levels.
The government has now provided these companies with some much needed relief. Indian companies can now buy back FCCBs at a discount during the extended deadline of one additional year, i.e. till FY13. This is bound to ease the redemption pressure of a number of companies whose bonds are maturing this year. The panel has also set new discount rates for FCCB buyback. Companies can now buy-back bonds at a discount to the accrued value instead of at book value.
Companies will have to compulsorily park up to 25% of the value of FCCBs at maturity into a redemption fund. Companies have also been allowed to have a line of credit up to 25% from banks and financial institutions to fund FCCB buybacks, according to a Finance Ministry official.
All these moves will help reduce the refinancing risks that a number of these debt laden companies are exposed to. However the cost of setting up such reserves etc may reduce the overall attractiveness of FCCB instruments. Financially strong companies can take advantage of this buyback scheme. However, the weaker companies (for eg. Suzlon), who are not generating enough cash flows, may have to resort to asset sales, in order to meet their obligations.