fccb

ITM CAPITAL AND MONEY MARKET

World of FCCB

Foreign Currency Convertible Bond

Project Complied by:

Group no – 05

Sanket Thakkar-30Deepa lohana-05Dilpreet kaur alag-07Nitya Menon-25Kundan Dalvi-18 ITM CAPITAL AND MONEY MARKET

INTRODUCTION TO FCCB Foreign Currency Convertible Bonds are debt instruments

issued in a currency different than the issuer’s domestic currency with an option to convert them in common shares of the issuer company. FCCB are also referred as Foreign Currency Convertible Notes.

FCCBs are essentially foreign currency-denominated debt with a maturity period of three-to-five years.

The investor has the option of converting the bond into equity.

He (investor) would typically convert it into equity and sell it for a premium if the stock is trading above the conversion price, which is the price at which the bond is to be redeemed. In the eventuality of non conversion, the bond has a coupon rate and a redemption premium.

If the scrip is trading below conversion price, the investor would hold the bonds as a debt paper and go for redemption on maturity. Either way, the investment is protected.


FEATURES OF FCCB• The interest on FCCBs is generally 30% -40% less than on

normal debt paper or foreign currency loans or ECBs. This translates to cost saving of approx 2-3 percent p.a.

• FCCB can be secured as well as unsecured. Most of the FCCB issued by Indian Companies are generally unsecured.

• FCCB can be converted into Indian Shares or American Depository Receipts (ADR) or Global Depository Receipt(GDR)

• FCCB are generally listed to improve liquidity, generally Indian issuer have listed at Singapore Stock Exchange and in many cases also on Luxembourg Stock Exchange.


Company can issue FCCB only upto value of USD 500 million in a single year.

Issue of FCCBs exceeding USD 500 mn subject to approval of RBI.

The company issuing FCCB should be listed in NSE & BSE and the minimum net worth should not be less than 500 Crores for 3 consecutive years.

Minimum average maturity shall be 3 years for borrowing upto US $20 million and 5 years in case it exceeds US $20 million.

FCCB can be raised under the automatic route and also by the approval of Reserve bank of India (RBI).

The automatic route is available to real sector i.e. Industrial sector, especially infrastructure sector-in India, financial housing sector HDFC, LIC housing Finance while all other sectors have to take the RBI approval.

Guidelines laid down by Reserve bank of India (RBI) for issue of FCCB:-


Eligible issuerIndian corporate except financial intermediaries such as banks, FIs NBFCs.NGOs engaged in microfinance activities.

Eligible subscriberInternational Capital markets International BanksMultilateral Financial InstitutionsExport Credit AgenciesSupplier of equipment Foreign Collaborator..Foreign equity holder

Permitted End Use Prohibited End Use

Investment in ‘real-industrial’ sector including SMEs and infrastructure sector through expansion, modernization, import of capital goods, new projects etc.

Investment in real estate excluding integrated township

Overseas Direct Investment in joint ventures/wholly owned subsidiaries.

On-lending

First stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSUs

Investment in capital markets.

Acquisitions.

As working capital

For general corporate purposes

For Repayment of Rupee Loans


Structure of FCCBIssuer of FCCBs Lender of money

Capital in $

FCCBs

29-Apr-2010 raises money in dollars sets conversion price at premium (say Rs 125) maturity period between 3-5 years

29-Apr-2010 receives FCCBs can trade FCCBs if in liquidity

crunch

If markets are good…

Issuer of FCCBs Lender of money

Equity at conversion price

FCCBs Converted

29-Apr-2015 no need to pay in cash issues equity at pre decided price (Rs 125) equity dilution

29-Apr-2015 makes windfall profit by selling equity at

prevailing market prices (say Rs 200)

Issuer of FCCBs Lender of money

Capital in $

FCCBs returned

29-Apr-2015 redeem bonds at par value huge requirement of cash buy back from market before

maturity if traded at discount

29-Apr-2015 redeem FCCBs at par value principal investment comes back with

small returns

If markets are bad…

FFLO


FCCBIF NOT

CONVERTEDIF

CONVERTED

REDEEM BONDS WITH PREMIUM

AT MATURITY

BUY BACK BONDS EQUITY DILUTION

REFINANCE

ISSUE OF NEW FCCB

RAISE PLAIN VANILLA DEBT Raise Equity

FLOW CHART

Venus Remedies –Indian company is slapped with a winding-up petition

Venus Remedies, Chandigarh-based company defaulted on a foreign currency convertible bond (FCCB) issue.

New York-based DE Shaw and Chicago-based Citadel Investment subscribed to a $12-million FCCB issue of Venus Remedies in May 2006 which is came up for redemption on May 2 2010, but company failed to pay the investors.

Sue against — defaulted to honor FCCB investors. Formal request to a court for the compulsory liquidation of a company — by FCCB investors.

Willful default by company-Crisil had in February 2009 assigned A-rating to Venus Remedies on its debt facilities, citing comfortable financial risk profile marked by healthy size of net worth and strong debt protection indicators.

Court ordered payment of USD 7 million to investors and fresh bonds worth USD 5 million to be issued for 5 years and YTM of 4%.


Introduces Buy-back / Pre-payment of Foreign Currency Convertible Bonds (FCCBs) on 15th November 2008

Automatic Route : Buy back value of FCCBs should be at a minimum discount of 15% on the BV Funds to be used for this purpose will be either existing foreign currency

funds held or out of fresh ECBs.

Approval Route: Buy back value of FCCBs should be at a minimum discount of 25% on the BV.

Funds to be used for this purpose shall be internal accruals; and

Total amount of buy back shall not exceed US$ 50 Mn


Approval Route Revised1. Total amount of buy back permitted shall not exceed US$ 100 Mn out of internal accruals, subject to:

Min. discount: 25% @ Redemption value US$ 50 Mn Min. discount: 35% @ Redemption value US$ 50 – 75 Mn Min. discount: 50% @ Redemption value US$ 75 – 100 Mn

2. Later RBI issued notification to consider further buy back of FCCBs (only under approval route) till 30th June 2010.


Amou

nt R

aise

d (U

S$ B

illio

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* 2010 data is till April 2010

Fund raising through FCCBs

No. of FCCBs: 75Average : $100.33 Mn




Funds raised through FCCBs


FCCBs Pros FCCBs Cons

Provides downside protection for the investor with an option on the equity know as the “Equity Kicker”

The risk for the investor is that the stock of the issuer does not perform over the life of the bond and the investor returns the bonds back to the issuer at maturity above par depending on the coupon structure.

If the stock does not perform over the life of the bond, then at maturity the issuer redeems the bonds back at a premium, which is basically the accretive yield on the bond.

Will the issuers be able to redeem their bonds back on the redemption date?

For the issuer, the FCCB (mostly Zero Coupons) are not shown through the P&L until maturity, which makes this an attractive method of raising finances.

From the investor’s prespective, a convertible bond has a value-added component build into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock

From the issuer’s perspective, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock


CREDIT- LINKED NOTES• CLN is a credit derivative linked to foreign currency convertible

bonds (FCCBs).

• Protection from Credit Risk.

• Indian bank overseas wings bank buys CLN.

• No Default by FCCB issuer the bank makes money on this.

• Syndicating foreign banks exit after offloading the CLN in the secondary market.

• Lapped up by Indian banks as they earn a coupon of 50-60 basis point.


To Conclude…• It is a low cost debt as the interest rates given to FCC Bonds are normally

30-50 percent lower than the market rate because of its equity component.

• Greater return potential if the stock price appreciates more than the previously fixed conversion price.

• Conversion of bonds into stocks takes place at a premium price to market price. Conversion price is fixed when the bond is issued. So, lower dilution of the company stocks.

• Investors are mostly non-residents or hedge fund arbitrators.

• Saves the risk of immediate equity dilution as in the case of public shares

• Redeemable at maturity if not converted.


Case Study – Fund Manager VM is a Fund Manager working with one of the Top Five

mutual fund . He typically, visits 3-4 companies a month. As a Fund Manager

he is in great demand. He likes to stay alert, 24X7.He keep checking stock ideas

company updates from company firms. Real estate companies gives fund managers flats at throw

away prices in return for subscribing to their IPOs. Market operators & promoters are also known to pay cash to

fund managers to buy stocks off them. In 1990, A fund manager of leading US Investment firm who

was fired for allegedly taking sexual favours from some investor’s.


During 1999-2000, fund managers used to buy illiquid technology stock to boost NAV(Net Asset Value).He has been approached several times for favours , by providing expensive gifts, free passes for movies, music concert etc..but he rebuff them.He doesn’t chase inside information. Instead, he prefers to rely on market intelligence, his sources are his friends, broker, vendor or relatives.VM say’s, A Good Fund Manager should :1. Be on top of at least 100 companies.2. Know their company balance sheet.3. “Be forgiven for going wrong on valuation occasionally , but not

for going wrong on a business”.4. Believes that there is fine line between insider information &

research information.

fccb

Documents

fccb investors

issue of fccbs

features of fccb

capital goods

equity dilution capital

ible bond itm capital

fccb issue of venus

foreign currency loans