Having learnt their lessons from the global economic meltdown, Indian companies and foreign investors

RELATED ARTICLES MAN Industries repays FCCBs worth $64.35m RBI approves restructuring proposal for Subex FCCBs

have changed the contours of foreign currency convertible bonds (FCCBs). The bondholders are now looking for better returns than banking on fluctuating stock market prices.

“The bondholders are now more focused on regular returns against benefits on maturity,” a senior investment banker said.

In all recent deals, the bondholders have insisted on higher interest rate on bonds and lower redemption premium, he added.

Primarily considered debt, these bonds are converted into equity at a pre-determined price if the stock price goes above the conversion price. Investors get interest payments (also called coupon) during the period it remains debt. If investors decide against conversion and instead redeem the bonds, they receive a redemption premium.

Companies such as Apollo Hospitals, Aksh Optifibre, Core Projects, Tata Power, REI Agro, Tata Motors and JP Power Ventures issued FCCBs in the recent past and saw the bondholders demanding change in terms and conditions.

“The coupons (interest rates) have gone up by as much as 500 basis points,” an investment banker said. According to him, the companies are now paying 1-7 per cent as coupon rate against 0-2 per cent earlier.

“Companies are also opting for servicing coupon than pay in bulk at the time of maturity,” the banker added.

However, to offset the higher outgo due to increase in coupon rates, companies are seeing drastic correction in the redemption premium offered to the bondholders.

“In the recent past, as the stock prices have been lingering far below the promised conversion price, the bondholders were not keen to convert bonds into equity shares,” an ICICI Securities official said.

A recent report by Edelweiss Capital reveals that FCCBs now carry a redemption premium of 0-20 per cent against 25-40 per cent earlier.

“This will reduce the impact of heavy bullet payment on companies in the event of non-conversion,” the report said.

FCCBs were preferred instruments for raising money overseas for expansion and growth plans that Indian companies had in 2005-08 period. Besides, the convertible bonds do not pose an immediate equity dilution risk for the companies. According to various reports, close to $10.9 billion was raised during 2005-08.

In some cases, the bondholders have insured themselves against drop in stock prices by asking companies to keep their conversion rate nominal (more realistic to the current market price) and issuing more shares against the bond.

“This has been evident in cases where companies had to rollover their old bonds and issue more share against each bond,” a senior banker from a foreign bank said.