Regulators’ role in FCCB refinancing called into question

Author: | Published: 1 Aug 2012
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As creditors are generally unwilling to redeem maturing Foreign Currency Convertible Bonds (FCCBs) by recycling debts, many affected companies seek to refinance their bonds through external commercial borrowings (ECBs). To facilitate the refinancing process, the Reserve Bank of India (RBI) has decided to consider applications from Indian companies to refinance or restructure bonds under the automatic route. Legal commentators argue, however, that the regulators should play a much more significant role to clear concerns in the industry.

The crisis

FCCBs are convertible instruments that are popular among Indian companies in helping them access international markets. This was particularly the case during the years 2005 to 2008, when the stock market was performing well. As its name suggests, FCCBs are tie-up loans that have equity as convertibles. These bonds normally involve lower borrowing costs and are issued in very low coupon rates, sometimes even zero coupon rates. The conversion prices were set at 25% to 150% above market price in expectation of increased share prices. During the period above, some 201 Indian companies raised close to Rs 72,000 crore through FCCBs.

After a few years, the FCCBs mature and companies now need to repay their debts. However, due to the poor performing stock market, many lenders are now unwilling to convert debts into equity. For example, Mumbai-based JSW needs to repay US$273 million-worth of FCCBs on June 28. However, by February 3, the company was trading at Rs 708.95, which is much lower than its FCCB conversion price of Rs 953. Making the situation worse is the weak Rupee, which makes refinancing much more expensive. When most FCCBs were issued in 2007, the Rupee was trading at Rs 42 to US$1. Now, the Rupee is trading at Rs 52.6 to US$1.

Close to one hundred companies will need to repay an estimated amount of US$8.9 billion by the end of fiscal year 2015. Meanwhile, in January 2012, some 11 FCCBs neared maturity with a total outstanding amount of US$598 million. These companies were of course unable to repay their debts with their own cashflow, and it is hoped that lessons will be learned in time for those companies that have bonds due later in 2012 and 2013.

Refinancing options

In February 2010, the Government of India (GOI) decided to allow companies to negotiate with investors to reprice their FCCBs. But this is hardly an option for issuer companies and their investors, as the implications on the share price of such companies would be far-reaching. This GOI initiative, therefore, has not been widely recognised as providing a workable solution to the FCCB crisis.

The most cost-effective way to redeem FCCBs is by replacing one bond with another bond that matures later, or by issuing new debt to overseas lenders or investors. Among the companies that have taken up the ECB option is telecoms operator Reliance Communications (RCom), which had to pay off FCCB debt valued US$1.2 billion by March 1 2012. Chinese banks Industrial and Commercial Bank of China (ICBC), China Development Bank Corporation (CDB) and Export Import Bank of China (China EXIM) lent approximately US$1 billion to Reliance at a rate of 5%, and extended the FCCB maturity period until March 2019. This was the largest refinancing of FCCBs by an Indian corporate to date, and counsel included J Sagar Associates and White & Case.

Companies in similar situations are also looking towards low-cost Chinese funds as European and US lenders decline to lend, considering such recycled bonds to be too risky. Participants in the infrastructure and power sectors, in particular, have shown an interest in obtaining these Chinese loans, as they are able to secure favourable terms if they also agree to other import-related deals with China's manufacturing companies.

To facilitate the refinancing process, in May 2011 the RBI decided to permit Indian companies to refinance FCCBs through raising new ECBs or FCCBs under the automatic route if the total amount did not exit beyond US$500 million. Capital raised for the redemption of FCCBs that did exit beyond US$500 million, on the other hand, would be considered under the approval route.

The global financial crisis has greatly limited potential sources of funds for companies to redeem FCCBs. Investors are worried about the risks involved in the recycled bonds that these companies issue, particularly when FCCBs are unsecured. The Reliance case was exceptional as the deal was influenced by the relationship between China and Reliance's owner, Anil Ambani, who often employs Chinese state-run contractors. It remains to be seen whether Chinese banks will be willing to refinance other maturing FCCBs.

Reliance’s FCCB refinancing was the largest by an Indian corporate to date


The FCCB crisis is likely to expand as more FCCBs mature. As such, many legal practitioners take the view that the regulators should play a bigger role in helping companies to overcome the crisis. Niyati Mehta, a partner at J Sagar Associates, told Bar & Bench in February 2012 that the decision taken by the central bank, as well as the stand taken by the Indian courts, would have a great effect on the sentiment of the global investment community. She said it was crucial for Indian regulators to "interviene in the current market and to provide a cordial and practical approach".

And yet, the regulators have not taken any breakthrough decisions on settling the issues. And one senior banker was quoted in Asiamoney magazine (a Euromoney Institutional Investor (Jersey) Ltd-owned title) that the RBI considers disputes between lenders and issuers to be "private matters between borrowers and bondholders".

Trilegal banking partner Ameya Khandge says: "In some sense the RBI does make an effort in helping companies that are in trouble, but it is also being unrealistic. Even if it allows repricing of the FCCBs, it will hardly be of any help to both the issuers and the lenders. The lenders would not want to collect so much less money than what they've put in, while the issuers also wouldn't want a repricing that would have far-reaching effects on their share prices."

As a large number of FCCBs are set to mature in late 2012 and 2013, it remains to be seen how the regulators will intervene in the crisis.

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