Equity dilution threat looms in cos with FCCBs MUMBAI: Companies that have issued foreign currency convertible bonds (FCCBs) could be a jittery lot as the market continues to buckle under mounting pressure of global financial turmoil.
With no strong recovery in sight in the near term, investment bankers fear some of the companies, particularly the cash-starved ones where FCCBs are due for maturity in the next few months, may run the risk of diluting promoters' stakes substantially if they are not able to repay the debt to investors. As share prices have tumbled much below conversion prices in many cases, pressure may be mounting on companies to redeem the bonds by utilising own funds or to find out an alternative source of finance. If these two options are not available, they have to either extend maturity with revised terms or issue additional equity to make good the loss arising on conversion of the bonds into equity, according to investment bankers. According to investment banker Rashesh Shah of Edelweiss Securities, the problem of equity dilution will mostly be faced by companies with high debt/equity ratio. "Such companies will not borrow more and so they will be forced to convert FCCBs into equity at any cost," he said. This, however, should not be a major concern in the current market as many conversions are happening only after a year or two; and by then, the conditions may improve, added Mr Shah. FCCBs of many companies are maturing in the next couple of years, which mostly include fundamentally-strong companies with proven track record. Investment banking and broking firm Edelweiss Securities recently compiled a list of FCCB issuers to analyse the impact of new accounting standard (AS 30 & 31), according to which Sterlite Industries' $50-mn FCCBs will mature next month. Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ ACC, Adani Enterprises, Ashok Leyland, Bharati Shipyard, Jindal Stainless, L&T, M&M, Sun Pharmaceuticals, Tata Motors, Tata Teleservices, Wockhardt and Zee Entertainment are other major examples where the bonds are maturing between March and December 2009. While stocks of most of the companies are currently quoting at a discount to the conversion price, that should not cause concern among promoters, as most conversions are happening after some time and the companies are also financially strong to take the redemption burden. "A company should ideally pay back to FCCB holders so that it would not lose credibility in the market. The repayment should not be a problem for large corporates as they generate sufficient cash from their businesses and also have capacity to raise funds from alternative sources," said Religare Securities president (Group M&A) Kiran Vaidya. Many companies had issued FCCBs to foreign investors during the boom phase between 2004 and 2007. One major advantage of raising funds through the FCCB market, according to bankers, is lower cost of borrowing compared to other options like issue of debentures and loan from banks or financial institutions. While the conversion prices were fixed on the basis of the prevailing high market prices, the current year's slide has rendered them unattractive, causing concerns among the issuers over the repayment, say bankers. -- Visit site at – http://investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Forums- http://forums.investorline.co.in/ Iwebs Open Source Web Publishing Platform - http://webs.investorline.co.in/iwebs/ --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
