Selective Strategy

15 Dec,2012 06:30 IST

Selective Strategy

StanChart does well in a declining FCCB market

Raghu Mohan


If there is a four-letter word in the world of investment banking, it is FCCB, short for foreign currency convertible bonds. Between 1 March 2012 and 15 October 2012, FCCBs amounting to $6 billion of 45 companies were due for redemption; but timely redemption was seen only in 66.5 per cent of the outstanding FCCBs, largely because the macroeconomic plot had gone for a toss. Yet, a long-standing foreign bank in India, Standard Chartered Bank (StanChart), seeks to play in this market.

It put through a $150-million five-year FCCB along with Barclays Bank for Jaiprakash Associates. And then another on its own for Amtek India — a $130-million five-year FCCB. StanChart accounted for 34 per cent of all FCCBs done this year.

Did someone say it makes no sense to be in this market? Venkat Ananthraman, managing director of wholesale banking at StanChart, says the bank puts through an FCCB transaction only for a select few. “If a client, however big, comes up with a proposal, we say no. It is only for existing clients.” For him, it is essential to know a client very well in these bad times. “When we do it for such clients, we have a clear idea about their working capital and cash-flow position.”

India Inc. has raised $600 million in 2012 till date; it was not much better in 2011, at $775 million. There have been six issues and six underwriters in 2012; it was six issues and three underwriters a year ago.

In 2011, the biggest FCCB was Essar Energy’s $183-million bonds placed by Deutsche Bank, JP Morgan and StanChart. But if you look closely at the pecking order in the FCCB space, it’s changed a lot. In 2011, you had a clutch of wellknown foreign banks. In pole position was Deutsche Bank followed by JP Morgan, StanChart, the Macquire Group, RBS and Credit Suisse. This year, it is ISM Capital, Arkios, Barclays Bank, DBS Group Holdings and First International Group. What explains the churn?

“We have been here for long and are not transaction-driven,” says Venkat. While it is true that many an investment bank walked in when the times were good, only to walk out when they turned bad, what has worked for StanChart is its “deeper relationships” with its clients. The FCCB market is not likely to improve anytime soon. Between 16 October 2012 and 31 March 2013, 23 companies are due to redeem FCCBs worth $1.56 billion. India Ratings, however, expects that an estimated 67 per cent of the total FCCB obligations of this period will not be redeemed on the due date.

The rating agency views FCCBs as debt for calculation of leverage. Thus refinancing FCCBs with debt or further FCCB issuance is unlikely to affect leverage. “The majority of the FCCBs had zero coupons or very low coupon rates, 1-4 per cent. So the immediate impact of refinancing is a significant increase in interest expense.”

Venkat is hopeful that the tide will turn soon. “The market (for FCCBs) will open up once sentiment on the bourses changes. It will help companies de-leverage and then you will see more FCCBs,” he says and adds tantalisingly, “I have one more FCCB deal. But I cannot talk about it right now. You will hear about it soon”. For him, FCCBs are a blessing.

(This story was published in Businessworld Issue Dated 24-12-2012)

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