Looking abroad

Indian corporates are flocking overseas to raise capital, resulting in a sharp increase in issuance of foreign currency convertible bonds. Uday Lal Pai reports

This year has seen a resurgence in dollar borrowings by Indian corporates, with funds raised from overseas markets totalling $12.77 billion from January to June, representing an increase of 63% from $7.83 billion in the same period last year. The figure for the whole of 2005 was $17.18 billion. Issuance of foreign-currency convertible bond (FCCB) issuance to raise capital has seen a particularly big increase.

Vanilla debt instruments accounted for half the overseas borrowing, and FCCBs the other half. In April-June 2006, corporates mobilised $2.22 billion through external commercial borrowings (ECBs), up 28.4% year-on-year, and $2.21 billion through FCCBs, a 273% rise from the same period a year before.

Indian companies are among the biggest FCCB issuers this year. According to New Delhi-based Prime Database, there were a total of 77 overseas debt issues by Indian firms up to May, totalling $7.9 billion, of which $6.3 billion could be termed as debt raised through 45 FCCBs and four plain bond issues.

Reliance Communications Venture has been the biggest borrower this year, raising FCCB loans of $550 million. The second major borrower was Jet Airways, which borrowed a long-term loan worth $443.45 million under the ECB window for import of capital goods. Among the other large borrowers were Sun Pharmaceutical Industries, which raised a medium-term loan for five years worth $350 million through the FCCB window; Ranbaxy Laboratories ($400 million), Jubilant Organosys ($200 million); Mahindra & Mahindra ($200 million); India Cements ($75 million); and Larsen & Toubro ($100 million). Amtek Auto also raised $250 million through an FCCB issue in June, while sugar producer Bajaj Hindustan in January raised $255.6 million through an issue of global depositary receipts (GDRs) and convertible bonds.

As for mid-cap firms, Hyderabad-based Bhagyanagar Industries recently completed the issue and allotment of 150 zero-coupon unsecured FCCBs for a total of $15 million. "The company requires funds for the $244 million infrastructure projects it has taken on, and we are planning to raise $15 million in the first phase," says Bhagyanagar chairman Narendra Surana.

Encouraged by easier access to foreign convertible bond markets, companies are turning away more demanding private equity investors as they look to fund their expansion projects. A booming stock market that has climbed 30% this year has helped firms raise their profile among foreign investors and boost valuations to around 15 times expected earnings.

The rush for FCCB issues is driven by the availability of cheaper funds abroad and the speed companies can raise them, say analysts, and the trend is likely to gain momentum. Another advantage is the premium Indian firms receive on their shares compared to domestic prices. A follow-on public offer or a rights issue in India may not get a significant premium over the current price in the Indian bourses. Indian promoters also get a lock-in undertaking from the foreign investors for GDRs/FCCBs.

"Convertible bonds are a lot easier than private equity deals, which come with strings attached, such as board representation," says one merchant banker. Most of the GDRs/FCCBs are raised from London, Singapore and Luxembourg Exchanges. "Listing on these overseas stock exchanges is less time-consuming, as there are fewer procedural delays," he adds.

Technical drivers

There are also technical reasons for the interest in FCCBs. The meltdown in stock valuations has brought a renewed interest in new FCCB issues. The conversion premia on FCCBs had shown a decline from the 50-60% mark at a time when the Sensex was hovering at 8,000 levels, to the 10-20% mark when it was around 12,000 levels. This was because players were expecting the stock prices would not rise much further. As a result, a large number of corporate borrowers were starting to make plans for equity issuance in place of converts, as markets were approaching fair valuations. The May/June correction in equity markets has once again rejuvenated the markets for converts, with a rise in the conversion premias. This is expected to bring renewed investor interest in FCCBs in the medium-term.

A further driver of FCCB interest is a pricing advantage for firms of nearly 1%, if you take hedging costs and withholding tax into account. Not counting hedging and withholding costs, foreign loans are cheaper by at least 3 percentage points. Tata Steel recently raised $750 million equivalent loans for between five and seven years at 5.6%, while a rupee loan would have cost at least 9%.

It is estimated that close to $1 billion will be mobilised by Indian companies in the fourth quarter; and this momentum will only increase, say players. While nearly half the money will be accounted for by Tisco - which has announced a $500 millon FCCB issue - a dozen mid-cap companies are also exploring this route, such as Mumbai-based India Cements, Asian Electronics, (a manufacturer of energy-efficient products) and Hyderabad-based Vishaka Industries.