Cos may land a windfall from FCCB buybacks

WHEN Moser Baer, the world’s second-largest manufacturer of compact
discs, bought back foreign currency convertible bonds worth $51
million in the last three months, it had to pay just $12.4 million.
Depressed market conditions and a liquidity crisis helped the company
make a gain of around $38.6 million, which translates into an
extraordinary gain of over Rs 190 crore at the current exchange rates.
“We have bought back the FCCBs at a discount of around 75%,” said
Yogesh Mathur, chief financial officer of the company.
Apart from bringing down the liabilities on the company’s books,
the transaction may also help it bring down mark-to-market losses
provided for against the FCCBs. These gains will help the company post
better results in the fourth quarter of the fiscal ended March 31.
Ever since the Reserve Bank of India allowed Indian companies to
buy back FCCBs in December 2008, a dozen companies have redeemed such
bonds worth $340 million at deep discounts to the conversion price. As
in the case of Moser Baer, these companies also will earn twin
benefits from FCCB buyback. When they pay off a loan at a discount,
they earn a substantial one-time gain. Also, they need not carry the
mark-to-market losses for the redeemed FCCBs.
During the first nine months of the last fiscal, firms following
Accounting Standard 11 had written off heavy mark-to-market losses
towards outstanding FCCBs with the rupee depreciating significantly.
For example, Jubilant Organosys wrote off over Rs 410 crore in the
first nine months, while JSW Steel booked Rs 808 crore as MTM losses.
According to industry sources, a part of such earlier provisions
representing the bought back FCCBs could now be reversed.
Although these companies have published their FCCB buyback
exploits, some of them, such as M&M and Firstsource Solutions, remain
tight-lipped about the discount they received, which could give away
the possible extraordinary gains they are likely to book. A press
release by Financial Technologies, which redeemed FCCBs of $9.5
million face value, mentions the average discount was a little above
37%. This could earn the firm Rs 17.5 crore of gains the quarter.
Ruchi Infrastructure had to pay a little more than 50 cents to a
dollar according to their release, which translates into a gain of
around Rs 37.5 crore. Wherever the firms had booked accrued interest
on these zero coupon bonds, the book value of such bonds will be
accordingly higher and hence, the extraordinary gains will also be
higher.
So far, Jubilant Organosys has taken the maximum benefit of this
opportunity, redeeming $60.9 million of FCCBs in the March quarter and
now has $192 million of FCCBs outstanding. The average discount the
firm received was 40% of the maturity price of the FCCBs, said R
Sankaraiah, finance director, Jubilant. Firstsource Solutions ($49.7
million), JSW Steel ($47.8 million) and Uflex ($45 million) are the
other companies.
Most firms went in for ECB for this purpose, wherever their forex
earnings fell short. “We have arranged a seven-year ECB line for
repaying $49.7 million of FCCBs due in 2012 at a deep discount. So,
not only our liability has gone down, we also have a longer duration
to repay it,” said Farid Kazani, CFO of Firstsource Solutions. K
Chandrasekhar, senior VP, finance, M&M, also acknowledged raising ECB
for redeeming $10.5 million of FCCBs.