Take 100 and give 50 – Sakthi sugars and the FCCB saga

If you were lend me 100 rupees and if i were to return you say 50 rupees, are you going to accept that. Even that after say 2 or 3 years ? No, Not at all. In fact, you are probably going to break my bones. But, you know what ? There is somebody who gives that kind of money. They can be Deutsche bank or JP Morgan or even Gold man Sachs. But, for that, you will probably need to be Sakthi Sugars.

FCCBs are debt instruments, issued normally in dollars, with an option to convert them to equity at a pre-determined price. The convertible bonds, which help companies raise foreign currency funds at attractive rates, have largely been zero-coupon bonds, where the interest payment is due on the maturity of the bonds. As a result, there is no cash outflow from the issuing company either towards interest payments or for repayment of principal.

FCCBs are usually priced at a premium of 30-70% over the prevailing market price of the share and the option holder converts the bonds to equity if the stock price exceeds the conversion price. If the market price of the stock does not exceed the option price, the holders will not opt for equity conversion and the issuer will have to redeem the debt.

Although these instruments are treated as debt on the balance sheet, the assumption at the time of issue is clearly that the bonds will get converted into equity and no payments need be made by the issuer towards redemption. Even more, how many of you know that companies do not account for the interest that they pay for the FCCBs that are outstanding in the Profit and Loss statement. There are still a number of companies that have FCCB worth millions of dollars and are paying interest on it and continue not to show them in P and L statement.

In May 2006, Sakthi Sugars had issued FCCBs worth $60mn worth to set up two co-generation plants and a green-field sugar mill near Erode. The FCCBs were issued in 2 tranches; $20 mn Series A bonds with maturity of 3 years and $40 mn Series B bonds with maturity of 5 years, including greenshoe option upto 20%.

Series A bonds expired in May 2009 and it defaulted on the bonds. Sakthi Sugars entered into a Restructuring Agreement with the lenders on June 29, 2009, to restructure its debts under the corporate debt restructuring scheme announced by Reserve Bank of India. As a part of that restructuring agreement, it has converted the FCCBs to equity shares.

The company has so far allotted around 50 lac shares in the last 3 months on conversion of around 20 million USD. Average price of conversion works out to around 200 rupees per share and this was when the share price of Sakthi sugars was quoting at 100 rupees and lower.

Yes, shares were converted at 200 rupees per share when the share price was quoting at only 100 per share. And now i believe that the share price is quoting at only around 70 rupees per share. At the conversion price, there has been a loss of more than 50% on the FCCBs after waiting for more than 3 years. And these are not some small time investor like you and me. They are some reputed players and corporate giants like Goldman Sachs, JP Morgan, Deutsche Bank …

And if you were to think that these guys converted their bonds into equity shares since they had confidence in the company, thats absolutely absurd thinking. In fact, that was how one old analyst described this on a business channel. These corporate biggies converted their bonds since they had no other go and they wanted to avoid a legal tussle. They have already started selling whatever they converted, just from the next day of conversion at whatever price they could get. JP Morgan alone has sold around 14 lac shares in the open market. And if you were to ask me if any kind of out of market settlement were done, i dont know and frankly i cannot comment on such things :)

Arun Gopalan $ Lead – HBJ Capital Service Pvt Ltd,


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