Analysis Beyond Consensus - FCCB: The Final Countdown ::Edelweiss

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Our analysis for BSE 500 companies highlights that out of 28 companies with FCCBs maturing by FY13, 25 will face FCCB redemption, translating into INR330bn cash outflow. Steep INR depreciation has resulted in huge MTM losses, which coupled with redemption premium (generally kept off P&L) will lead to higher effective cost of borrowing through FCCBs.  While refinancing through domestic debt will trim PBT, companies resorting to restructuring of FCCB will face higher dilution.

FCCBs of INR330bn maturing till FY13

As on October 24, 2011, 28 companies in the BSE 500 had aggregate FCCB outstanding of INR245bn maturing by FY13. We estimate that out of these companies, possibility of conversion in case of 25 companies seems remote even after considering 20% CAGR to the current market price, redemption of which would lead to cash outflow of INR330bn.

Table 1: FCCB redemption pattern                                        (INR bn)

Cumulative MTM loss of INR63.2bn will further stretch cash flows

With the INR depreciating steeply (~17%) during FY12, FCCB liabilities have catapulted further by INR33.3bn. Concerns loom large for companies where FCCBs are due for redemption in the near future and hence the probability of MTM losses now being realised is high. On an aggregate, unrealised cumulative MTM losses on outstanding FCCBs as at November 21, 2011, stood at INR63.2bn. 

Refinancing of FCCBs likely to impact PBT by 11.2%

Assuming refinancing cost at 12% p.a., on an aggregate, reported PBT of shortlisted companies will be lower by 11.2%.