Analysis – FCCB Issue – JP Associates

Deepak Shenoy and I had an interesting conversation on Twitter today and I thought, instead of ‘storify’ing it like everybody does, and the ‘storify’ link getting lost in the melee, a blog would be better to capture thoughts. Also, the more I thought about this, some more details emerged. Hence the post.

Disclaimer upfront. There is no investment opportunity in JP Associates through this blogpost. This is only for informational purposes. I am not invested in JP Associates.

Amongst the wonderful companies that issued FCCBs in the boom period of 2006-07, JP Associates stood tall with a $400mn FCCB (I think only Tata Steel was more than that, at $875mn). As this note (which was also filed with NSE) on the website says, JP Assoc. issued $400mn worth zero coupon bonds at Rs. 854.33 (around Rs. 113/- in current pricing terms (they had a 5:1 split in 2007 and a 2:1 bonus in 2009)) with the conversion price being Rs.1238.78 (a 45% premium, which is erroneous – I’ll come to this in a bit) (Rs. 164/- in current pricing terms) (I am not accounting for $ to Rs. depreciation here – if you account that, then conversion price would be Rs. 220/-).

The CMP as of today is Rs. 64/-.

Needless to say, it is quite disastrous. The bondholders obviously did not convert their FCCBs and promptly demanded their money back. So, a few points here considering this past issue before we get to the present.

a) The conversion price was fixed at Rs. 40.35/- to the dollar. In hindsight, that was quite a stupid move by the FCCB holders considering that the rupee is now Rs. 55/- to the dollar (a 35% loss straight out). However, back in 2007, rupee was all the rage and people were talking of Rs. 32/- to the dollar (yes, even the CNBC folks). So yeah, tough luck. Since FCCB holders are usually savvy investors, ideally they should have (maybe, they have!) bought calls above a certain rupee-dollar equation to hedge forex risk.

b) The note (yes, the same note link as above) quotes a 45% premium. However it also mentions that YTM (yield-to-maturity) at 7.95%. In my enthusiasm, I overlooked the semi-annual* bit, and randomly used XIRR which gave me a result of 7.7%. I assumed it was roughly right and got along fine (I usually am fine with approximations rather than calculate to the exact decimal). However, Deepak pointed out that with a semi-annual it would come to 7.57% (for the curious, you need to use the YIELD function in Excel for this. XIRR assumes it’s annual). And indeed it was. Curiosity got the better of me, and I had to leaf through Annual Reports of JP Assoc. There it was! The premium was not actually 45%, but was issued at a 47.7% premium (based on which YTM promptly comes to 7.95%). How can you quote one figure in the ARs and one figure to the NSE is something I have no clue on? I couldn’t find any corrected NSE announcement either. Is this allowed?

Anyway, back to the present.

JP Assoc. as of Mar 30, 2012 had a debt of Rs. 50,300 cr. (CAT question: How many zeroes in that figure?). They had set apart Rs. 780 cr as redemption premium (as of Mar 30, 2012). Deepak informed me that they had paid off $50mn recently. So, out of $400mn FCCB, $50mn was paid off.

So, calculating, $350 mn remains. They raised $150mn just yesterday/today (I’ll come to this in a bit). So, remaining $200mn. If $ to rupee was not fixed at Rs. 40.35/-, the payment would have been Rs. 1100 cr. since the $ to Rs. was fixed at Rs. 40.35/-, JP Assoc. has to pay only Rs. 807 cr. Since they had already set apart Rs. 780 cr as of Mar 30, 2012, Rs. 807 cr by now shouldn’t be a problem. Rs. 300cr was saved by just fixing the $ to Rs. equation (imagine!)

That done, let’s get to the current deal of $150mn (done yesterday/today). This was also run by Barclays (even the last one was). Why did JP Assoc. go for another FCCB yet again? Well, apart from seemingly cheaper funding outside (risk of currency depreciation notwithstanding), there are other factors. As this Business Standard article explains

However, replacing FCCBs with other debt might cause a problem of a different kind. Though the accounting system in India does not require companies to account for FCCB interest costs on an accrual basis, for simpler debts the companies will have to account for the interest costs and that will hit the profit and loss accounts. According to Bloomberg and IIFL Research, JP Associates could end up with an additional interest of Rs 345.6 crore, which will impact the earnings per share of FY14 by 22.9 per cent.

Also, the redemption premium can be directly adjusted against the reserves’ accounts in the balance sheets. This means the debt-to-equity ratios of companies will rise, as adjusting the redemption money against the shareholders’ funds means the latter, or the reserves account, will go down by a similar amount.

Hence, FCCB is the route yet again (to pay off the previous FCCB and so on and so forth till we squeeze the last investor interested in the term ‘FCCB’ I guess!). JP Assoc. had applied for $500mn, got approved for $250mn (by ECB and RBI) and got funding for about $150mn. However, unlike the previous deal, which JP Assoc. got on very sweet terms (peak of the bull run, remember? the party would never end!), this time FCCB holders were smarter. Instead of a zero-coupon, it is a 5.75% coupon payable semi-annually. The conversion price is at a 10% premium to yesterday’s price, which is around Rs. 77.5/-. These FCCBs are redeemable in 2017 (hence approx. YTM works out to be 9.46%). There has been no circular at NSE yet, and hence we do not know how they fixed up the $ to Rs. conversion (which if you recollect has saved JP Assoc. close to Rs.300cr). 9.46% interest rate seems pretty darn cheap for a company with Rs. 50k cr debt, don’t you think (if they have fixed the $-Rs. equation that is)?

So, why did JP Assoc. stock tank today? Well, maybe the market thought that Rs. 77.5 as a conversion premium was a darn good deal for FCCBs and they would convert in 2017, leading to excessive dilution. Or maybe some major investor sold off. Or maybe there is some jhol. Or maybe, realistically, I might be gunning for the ‘expert’ position in CNBC who can explain every market movement with authority. Who knows? 🙂

*Semi-annual is what it says it is. Interest payable every 6 months (although compounded yearly). Most bonds are semi-annual. So, how can someone pay semi-annual interest on a zero coupon bond? Well, in case of zero coupon bond, that semi-annual stuff is used for calculation purposes only (calculating YTM for example). Interesting background story for this semi-annual stuff actually. It seems that this practice came through 100s of years ago when farmers used to borrow for their 6 month crop and hence interest rate back then (and hence coupon) was quoted semi-annually. Hence, majority of the bonds in the US atleast pay coupon semi-annually.

Disclosure: Not invested in JP Associates in any form (not even in their fixed deposit scheme – yes, they have one! check it out on their website). This post is only for educational and analysis purposes and should not be construed as advice for a buy or a sell.

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  1. #1 by PS on August 30, 2012 - 1:45 PM

    I used to work a bit with FCCBs. So a few small things: (a) conversion price is always fixed upfront; investors dont have flexibility to leave it open; they of course can hedge fx seperately (b) some FCCBs indeed pay coupon; FCCBs are not necessarily ZCCBs and though most FCCBs of 2005-2007 issue were zero coupon, most current ones (however few) pay coupons (c) pricing depends on credit quality, RBI cap and the call option value plus there could be asset swaps organized by the issuers. If the pricing desired does not fall within the RBI cap, some structured back to back arrangements (which one rarely comes to know of) may have been done.

  2. #2 by Deepak Shenoy on August 30, 2012 - 7:45 PM

    More on this: I think the rupee-dollar ratio is only for conversion to shares not for redemption as mentioned by @chondhe on twitter. That means they have to pay back an amount of $350mm plus a 47% flat return – which adds up to about $500 million. Of which they’ve borrowed $150 million, so they have to pay back $350 million, which is equivalent to nearly Rs. 2000 cr. today. That’s not money they have so they’ll borrow locally (I think).

  3. #3 by Vivek Gupta on September 5, 2012 - 7:48 PM

    “The conversion price is at a 10% premium to yesterday’s price, which is around Rs. 77.5/-”
    (Quoting you).
    Earlier you have mentioned CMP as 64. These prices do not add up.
    Even I could not understand your calculation of 9.46% ytm. Please clarify.
    Regarding your last para, most of it is general market practice, nothing wrong there I suppose.

    Thanks a lot

    • #4 by Rahul Krishna on August 10, 2014 - 4:57 AM

      I believe , the author of this post has made a nice attempt towards explining the basic but essential maths of FCCBs. However , at a premium of 10% over 64 , the YTM works out to be approx 7.67% , whereas at a premium of 21% over 64 i.e at 77.5 , the YTM works out at 9.60% approx.

      I sincerely request the author or any other participant to check this out and tell me if I am right in telling so…..

      Rahul Krishna

  4. #5 by brochure printing on July 1, 2013 - 6:00 AM

    Awesome! Its actually amazing article, I have
    got much clear idea regarding from this article.

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