The World of FCCBs
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Transcript of The World of FCCBs
World of FCCBForeign Currency Convertible Bond
Praful Anchaliya Sabina Islam Sahil Jain Vijay Krishna
Project Complied by:
Objective• Understanding of FCCB
• Conversion of FCCB
• Awareness of FCCB
• Why should companies go issuing FCCBs & Why should investors invest in them?
FCCBs & its features• 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
RBI GUIDLINESRBI GUIDLINES• Company can issue FCCB only upto value of USD 500 million in a single
year. However issue of FCCBs exceeding USD 500 mn subject to approval of RBI.
• Should be listed on BSE and NSE and minimum net worth during the previous three years should not be less than 500 crore
• Minimum average maturity shall be 3 years for borrowing upto US $20 million and 5 years in case it exceeds US $20 million.
• Can be raised through two route Automatic and RBI approval The automatic route is available to real sector i.e. Industrial sector, specially infrastructure sector-in India, while all other sectors have to take RBI approval
Structure
Issuer of FCCBs Lender of money
Capital in $
FCCBs
29-Apr-2009 raises money in dollars sets conversion price at premium (say Rs 125) maturity period between 3-5 years
29-Apr-2009 receives FCCBs can trade FCCBs if in liquidity
crunch
Issuer of FCCBs Lender of money
Equity at conversion price
FCCBs returned
29-Apr-2014 no need to pay in cash issues equity at pre decided price (Rs 125) equity dilution
29-Apr-2014 makes windfall profit by selling equity at
prevailing market prices (say Rs 200)
If markets are good…
Issuer of FCCBs Lender of money
Capital in $
FCCBs returned
29-Apr-2014 redeem bonds at par value huge requirement of cash buy back from market before
maturity if traded at discount
29-Apr-2014 redeem FCCBs at par value principal investment comes back with
small returns
If markets are bad…
Benefits to Issuer
Benefits to Investor
FCCB can be raised in a month usually and thus takes lesser time.
Help to diversify their portfolio
Low overseas interest rate Find better option to invest in emerging markets like India
Credit rating is not mandatory, since bonds are issued by top corporate having excellent rack record.
If share price goes up benefit from the capital appreciation
Low cost means of financing Assured of fixed return and capital appreciation.
Regards with FCCB
Rising Markets…
IVRCL INFRA…• 1 Bond is worth Rs. 1000/- (say)
• Conversion Price = Last trading price
• Last trading price = 369.95
• Market expectation = 400, since the rise.
Recent FCCBs• Reliance Energy has converted FCCBs of $112.84
million (about Rs 507 crore) into equity shares during the last 30 days
• JPMorgan officials say the bonds were sought after aggressively and priced at an attractive yield rate of 4.95 per cent
• The largest issuances were in the range of $500 million.
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.
THANK YOU
Foreign Currency Convertible Bond