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Strategy
Indian convertibles monthly
FCCB yields exceed 20% as the Rupee continues to remain weak. Activity has
increased in the FCCB space as large redemptions in FY2012E and a weaker Rupee raise
concerns regarding these obligations
FCCB activity – previous and upcoming
We witnessed a lot of developments in this space last month. While Financial Technologies paid
off its obligations amounting to US$133.1 mn on December 21, others like Orchid Chemicals
announced that they had managed to raise US$100 mn through the ECB route in order to pay off
their upcoming FCCB obligations in Feb 2012. Welspun Corp. offered to repurchase their FCCB
worth US$150 mn maturing in 2014 through a tender offer which began on December 7, 2011.
With bond holders unwilling to take a haircut on the convertibles, the tender offer failed. This
could be considered a positive as it implies that bond holders were confident about the repayment
capability of Welspun and were willing to take on the credit risk of Welspun. The next couple of
months are relatively subdued with Orchid Chemicals, the largest FCCB, coming up for redemption
in Feb 2012.
FCCB universe – companies in the FCCB space
The average yield for a basket of prominent FCCBs has shot past 20% in the last month after
hovering around 7-8% till August. For the prominent issuers (under KIE coverage), SUEL is yielding
25-47% for its different tranches. These yields are almost 20-25% above the YTD averages
indicating the spike in implied credit risk premium for SUEL in the past few months. Vedanta
Group companies like Sesa Goa and Sterlite have also seen yields rise from 10-12% to 14-15%
during the last month. Smaller companies like Everest Kanto and Rolta are yielding ~22% and
30%, respectively while Jaiprakash Associates is trading at ~24%.
KIE generalized CB valuation model – mispricing and implied credit risk premium
Companies like Aksh Optifibre, GTL Infrastructure and Subex are implying the highest probability
of default considering the fact that their CB prices are an indication of their implied credit risk
premium. Based on our generalized model, the implied credit risk premium for Suzlon and RCOM
is ~37% and 28%, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Indian convertibles monthly
FCCB yields exceed 20% as the Rupee continues to remain weak. Activity has
increased in the FCCB space as large redemptions in FY2012E and a weaker Rupee raise
concerns regarding these obligations
FCCB activity – previous and upcoming
We witnessed a lot of developments in this space last month. While Financial Technologies paid
off its obligations amounting to US$133.1 mn on December 21, others like Orchid Chemicals
announced that they had managed to raise US$100 mn through the ECB route in order to pay off
their upcoming FCCB obligations in Feb 2012. Welspun Corp. offered to repurchase their FCCB
worth US$150 mn maturing in 2014 through a tender offer which began on December 7, 2011.
With bond holders unwilling to take a haircut on the convertibles, the tender offer failed. This
could be considered a positive as it implies that bond holders were confident about the repayment
capability of Welspun and were willing to take on the credit risk of Welspun. The next couple of
months are relatively subdued with Orchid Chemicals, the largest FCCB, coming up for redemption
in Feb 2012.
FCCB universe – companies in the FCCB space
The average yield for a basket of prominent FCCBs has shot past 20% in the last month after
hovering around 7-8% till August. For the prominent issuers (under KIE coverage), SUEL is yielding
25-47% for its different tranches. These yields are almost 20-25% above the YTD averages
indicating the spike in implied credit risk premium for SUEL in the past few months. Vedanta
Group companies like Sesa Goa and Sterlite have also seen yields rise from 10-12% to 14-15%
during the last month. Smaller companies like Everest Kanto and Rolta are yielding ~22% and
30%, respectively while Jaiprakash Associates is trading at ~24%.
KIE generalized CB valuation model – mispricing and implied credit risk premium
Companies like Aksh Optifibre, GTL Infrastructure and Subex are implying the highest probability
of default considering the fact that their CB prices are an indication of their implied credit risk
premium. Based on our generalized model, the implied credit risk premium for Suzlon and RCOM
is ~37% and 28%, respectively.
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