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May 29, 2006

Are FCCB issuers in a fix?

Businessworld has an article on how the current stock market correction could create trouble for companies which have raised funds through foreign currency convertible bonds (FCCBs) with a conversion price predicated on a rising market.
FCCBs are bonds that give holders the option to convert them into equity at some future date, usually at a premium to the price of the company’s share at the time of the issue. IVRCL Infrastructures & Projects, for example, mopped up $65 million in December through an FCCB issue. Investors who have bought the bonds can convert them into equity at Rs 1,170 a share over the next five years, which was a 55 per cent premium on the quoted price that day (Rs 754.95).

The drop in stock prices has hit companies like IVRCL very hard. Its share was trading at Rs 248 when this article was being written. The conversion premium has jumped to an astonishing 371 per cent. In other words, the IVRCL share will have to go up by more than 4.5 times over the next five years before the FCCB investors can exercise their conversion option.

And what if the share does not reach these heights? The bonds will remain as pure debt on the IVRCL balance sheet. The last audited balance sheet of the company shows that the company’s net worth was Rs 257.64 crore and the total debt was Rs 247.17 crore. The leverage was a modest 1.08. Now, if the FCCBs are not converted into equity over the next five years, debt and leverage will double.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.