Fccb Group 1

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 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 )

the

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 dilu ti on • Div idend Distri bu tion

High interest rates in borrowings High coupon in bonds 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 crunch  maturity period between 3-5 years If markets are good…

Equity at conversion price

Issuer of FCCBs

Lender of money FCCBs returned

29-Apr-2014  no need to pay in cash  issues equity at pre decided price (Rs 125)  equity dilution If markets are bad…

29-Apr-2014  makes windfall profit by selling equity at prevailing market prices (say Rs 200)

Capital in $

Issuer of FCCBs

Lender of money FCCBs returned

29-Apr-2014  redeem bonds at par value  huge requirement of cash  buy back from market before maturity if traded at discount

29-Apr-2014  redeem FCCBs at par value  principal investment comes back with small returns

????Who gains Win-WinWin-Lose Benefits to Issuer

Benefits to Investor

FCCB can be raised in a month usually and thus takes lesser time.

Help to diversify their portfolio

Low overseas interest rate

Find better option to invest in emerging markets like India

Credit rating is not mandatory, since bonds are issued by top corporate having excellent rack record.

If share price goes up benefit from the capital appreciation

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

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

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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

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Setup of a SEZ in the Shendra Industrial Park near Aurangabad, Maharashtra, which will house the company’s R&D and manufacturing facilities

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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

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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

Maturity Period

Issue Size (Mn)

Conversio n price at maturity (Rs)

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

Company

Share price as on Sept 18,2009

????? 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 op tion as promoters wilsteep l have to pay the “now manyper of these bonds are trading at 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.

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

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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.

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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.

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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.

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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 2009s. wa nt to as signed A t-rati ngr to Venu s Remedi es on its debt facil ities , be ge unde ci tin g the comffres ortab 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).

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Protection from Credit Risk.

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Indian bank overseas wings bank buys CLN.

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

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Syndicating foreign banks exit after offloading the CLN in the secondary market.

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

Thank You