Our analysis of BSE 500 companies indicates an outflow of USD4.4bn on account of FCCB redemption during FY13. Stagnant equity markets, higher conversion price, embedded redemption premium and 36% INR depreciation during the past five years have diminished the likelihood of conversion. Realisation of forex losses and redemption premium are likely to result in borrowing cost on FCCBs at par with domestic debt.
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USD4.4bn FCCBs likely to come for redemption during FY13
FCCBs of USD6.0bn (INR 329.6bn) are outstanding as on May 28, 2012. Out of these, USD3.2bn (INR178.1bn) are likely to be redeemed during FY13, leading to an outflow of USD4.4bn (INR 245.3bn).
MTM losses on INR depreciation likely to be realised
The INR has depreciated ~36% during the past five years. Since most FCCBs have been kept unhedged anticipating conversion, MTM losses of INR83.1bn till now considered notional, are likely to be realised. This will lead to significantly higher cost of borrowing through FCCBs. Also, the INR depreciation will increase the effective conversion price and further lower the probability of conversion.
Did FCCBs result in cheaper borrowing?
Our calculation indicates effective cost of borrowing through FCCBs (maturing during FY13) will be 12.2%, which in our opinion would have been the cost had the companies opted for domestic debt.
Refinancing/restructuring to materially impact future EPS
Refinancing of FCCBs through domestic debt/ECBs is likely to significantly increase interest cost, which hitherto had been kept off P&L, while restructuring will lead to higher dilution.
Regards,
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