A bitter pill in today’s world?

Group 7
Sameer
Sohail
Sankar
Himanshu
Arun V M
1
Agenda

• Fundamentals

• A bitter pill?

• Story 1 : Wockhardt

• Story 2 : Tata Motors

• Parting thought …

2
ABC of FCCB
• Foreign Currency Convertible Bond (FCCB) - Mix
between debt and equity instruments

• A quasi-debt instrument attractive to both investors and issuers

• Acts like a bond by making regular coupon and

principal payments, but these bonds also give the bondholder the
option to convert the bond into stock

• Investors receive the safety of guaranteed payments on the bond

and are also able to take advantage of any large
price appreciation in the company's stock

3
It’s different!

4
 Anatomy of an FCCB…
Capital in $
Issuer of FCCBs Lender of money
FCCBs
29-Apr-2009 29-Apr-2009
 raises money in dollars  receives FCCBs
 sets conversion price at premium (say Rs 125)  can trade FCCBs if in liquidity
 maturity period between 3-5 years crunch

If markets are good…

Equity at conversion price
Issuer of FCCBs Lender of money
FCCBs returned

29-Apr-2014 29-Apr-2014
 no need to pay in cash  makes windfall profit by selling equity at
 issues equity at pre decided price (Rs 125) prevailing market prices (say Rs 200)
 equity dilution

If markets are bad…

Capital in $
Issuer of FCCBs Lender of money
FCCBs returned

29-Apr-2014 29-Apr-2014
 redeem bonds at par value  redeem FCCBs at par value
 huge requirement of cash  principal investment comes back with
 buy back from market before small returns 5
maturity if traded at discount
A Win-Win proposition ?
Capital in $
Benefits for Investors
To bring down their exposure in one country by
diversifying their portfolio
Wanted to invest in emerging markets and India
looked good
Gives much of the upside of investment in equity
If share price goes up, benefits from the capital
appreciation
Debt element protects the downside
Assured of a fixed return and capital protection
Investors buy FCCBs not as instruments of debt but ECB instruments
for the lure of the equity
FCCBs
Benefits for Issuing Companies
Easy way to "dollarise" balance sheets
Low overseas interest rates
Relatively strong rupee against the greenback
FCCB does not require any rating, nor any covenant like
securities, cover etc
Can be raised within a month while pure debt takes longer
to raise
Low cost means of financing
Cost of withholding tax is lower for as compared to other
No need to shell out large sums of money to redeem the
debt 6
The Indian Context

7
Biggies who played the FCCB game
Name Maturity Issue Size Conversi CMP (As
Period (Mn) on Price on 28
Bajaj Feb, 2011 120 USD 465 Apr 09)
18.34
Hindusthan
Moser Baer Jun, 2012 75 USD 546 65.25
Aurobindo May, 2011 150 USD 1014 218.15
Pharma
Tata Motors Mar, 2011 11760 JPY 1001 232.80
Tata Motors Jun, 2012 450 USD 961 232.80
Hind. Mar, 2011 100 USD 248 51.70
Construction
Wockhardt Sep, 2009 110 USD 486 89.85
3i Infotech 2012 100 USD 462 44.00
Bharat Forge Apr, 2010 60 USD 384 120.25
Ranbaxy Mar, 2011 440 USD 716 165.30
Reliance May, 2011 500 USD 476 207.55
communication
8
Tata Chemicals Jan, 2010 150 USD 231 164.75
Current Scenario

9
A bitter Pill

In today’s financial downturn …

• Conversion price of FCCBs has gone several times higher than
their current market price
• Investors disinterested in converting their bonds into equity
• Rupee at low, high INR payment awaiting

A bitter pill to swallow for issuing companies …

• Search for resources to repay the debt with fresh expensive

borrowing
• Reset the conversion clause, to bring it closer to reality - Potential
dilution of share holdings

10
Wockhardt’s Big Plans
• Board meeting of Q2, 2004 - Wockhardt launched its maiden FCCB
issue of US $ 100 Mn with a Greenshoe option of US $10 Mn

• 5 year, zero coupon bond with a 50 per cent premium and a yield of 5.25 per cent
compounded semi-annually

Purpose:
• To expand reach in Europe through the inorganic route –acquired two companies in
Europe and established its own sales and marketing organization in the US

• Setup of a SEZ in the Shendra Industrial Park near Aurangabad, Maharashtra, which
will house the company’s R&D and manufacturing facilities

• Targetted a big-ticket acquisition in end 2006 - early bidder for betapharm, a generic
drug firm in Germany which was later acquired by Dr Reddy’s Laboratories Limited

• Acquired 3 major companies for $453 million in the last 30 months (Ireland based
Pinewood Laboratories for $150 million, Negma Laboratories of France for $265
million and Morton Grove Pharmaceuticals of US for $38 million)

11
 A sob story today….
• Current market price of INR 89.85
• Debt equity ratio of 2.3:1
• Current debt of INR 3400 crores – more than 3 times market
capitalization of INR 936 crores

• Forex derivative losses of $300 Mn which must be paid within

the next 6 months

• Unconverted portion of FCCBs: $ 108.5 Mn

• Interest payable for unconverted FCCBs: $ 32 Mn
• Total amount due on maturity date (Sept 25, 2009): $140.5 Mn
• Fitch downgraded long term rating from A to C and maintains
a negative rating watch
12
Getting out of jail …

• Chairman and MD Habil Khorakiwala resigns paving

the way for his son Murtaza to take over the leadership of the company

• Corporate Debt Restructuring (CDR) through ICICI Bank – statutory

audits delayed and results for Q4 2008 declared on 25th April 2009

• Issue of INR 500 crores worth of preference shares at a face value of

INR 5 approved in January 2009

• Embarks on a divestment plan with a strategic partner for non core

businesses and activities. Licensing out biotech drugs under development
to a partner

• Authorized share capital increased to INR 175 crores from the existing
INR 125 crores through issue of 10 crores equity capital

• ICICI, IDBI and SBI prepared to lend to the company for pre payment

• Divesting minority stake in Wockhardt hospitals 13

FCCBs issued by TATA Motors

• April 2004 • July 2008

 tranche I: $300-million
 conversion price INR 780.40
 maturity on March 28, 2011
 tranche II: $100 million
 conversion price of INR 573.10
 maturity on March 28, 2009
 raised $490 million
 conversion price INR 960.96
 maturity comes on June 12, 2012
 repurchased 170 Zero Coupon
Convertible Securities at avg. price of
50.375%.
 outstanding bonds reduced from $490
million to $473 million.

• March 2006
 $100 million raised in Japanese Yen (JPY
11760 million)
 convertible at INR 1,001.39
 maturity on February 19, 2011
 repurchased 30 Zero Coupon Convertible
Notes at an average price of 54.27%
 outstanding bonds reduced from JPY 11760
Mn to JPY 11460 Mn
15-Apr’09: Tata Motors share prices jumped 12.41%
to INR 283.50 on BSE after the company repurchased
and extinguished its US and Japan listed foreign
14
currency convertible bonds at 50% discount
RBI’s recent guidelines
 In December 2008, RBI relaxed guidelines of FCCBs to companies
by allowing premature buy-back of FCCBs through rupee resources

 On March 13, 2009, RBI further liberalised the norms by extending

the deadline for companies to complete the buyback by nine
months from March 31, 2009 to December 31, 2009

 In April 2009, Under approval route, RBI relaxed amount of buy

back from $50 Mn of the redemption value per company to $100
Mn

 The FCCBs bought back/repurchased from the holders must be

cancelled and should not be re-issued or re-sold

15
Points to ponder
 Increase (from $50M to $100M) in limit of premature buy-back of
FCCBs using Indian currency
- Very less impact because of unavailability of sellers and a scarcity of funds with
Indian companies.

 Another option is to buy back those bonds using foreign currency

reserves or through fresh borrowing in foreign currency (No limit)
- But raising funds in foreign markets at this moment is a big challenge (Global credit
crunch).

 So it benefits only those companies who have enough cash in their

internal accruals
- But there are not many companies

16
Parting thought …

"Some debts are fun when you are

acquiring them, but none are fun
when you set about retiring
them”

~ Ogden Nash

17
18