India Inc plumps for FCCBs

A spiralling stock market and rising interest rates have made foreign currency convertible bonds corporates' favourite instrument to raise resources overseas.

Of the 25 overseas debt issues that raised an aggregate of $1.713 billion in the first half of 2005, 24 companies opted for the FCCB route.

Indian Railway Finance Corporation's $124 million issue was the only pure debt issue. The rest decided to go for quasi-debt fund raising through FCCB, aggregating $1.59 billion as per the data available with Bloomberg.

An FCCB offers investors the option of converting bonds into equity shares within a specified period or on maturity.

FCCBs are the preferred instrument for raising funds in a rising stock market as the conversion price of the quasi-debt paper is at a premium to the current stock price.

"FCCBs are attractive as stock markets are doing well. It makes sense for companies having large capital expenditure on the anvil. Else, it could create problem on the debt ratio side at a later stage," said Ravindra Kumar, country head, investment banking, ING Vysya Bank.

Tata Power raised the highest amount through FCCB followed by Essar Oil and Tata Chemicals. "There is a growing pool of liquidity available for FCCB issuers in the current market," said Madan Menon, co-CEO, Barclays Capital in India.

Amtek Auto this year raised overseas funds through a $150-million FCCB and a $60-million syndicate loan.

Barclays, as the sole arranger, has helped raise $310 million through FCCB issues this year.

In addition to Amtek Auto's $150 million, it also helped Jaiprakash Industries in raising $100 million at a coupon of 0.5 per cent and Mercator Lines $60 million at a coupon of 1.5 per cent.

Eighteen other corporates raised funds overseas through issue of FCCBs at coupon rates ranging from zero to 2.5 per cent. Tata Chemicals raised $150 million, Tata Power Company $200 million and Alok Industries $ 60 million in two tranches -- all at a coupon of 1 per cent.

Essar Oil arranged $166 million and Essar Shipping $47 million at floating rate spreads of 325-basis points and 125-basis points respectively.

Glenmark pharmaceuticals raised FCCBs in two tranches of $ 50 million and $20 million, both at zero coupon, according to Bloomberg data.

At the same time, Kumar said, companies are unlikely to raise FCCB too frequently as this could impact their price-to-earnings ratios and the capital of the company.

Investment bankers said FCCBs are normally priced in favour of the issuers. The coupon on FCCBs is ordinarily about 30 per cent less than on normal debt paper.