Foreign Currency Convertible Bonds (FCCBs) are hybrid debt instruments. Thus, they present a cheap option for corporates to raise money in overseas markets. However, with stock prices of many companies falling below the conversion price, these corporates are facing a huge redemption risk now. In fact, as per Fitch reports, at least 20% of the FCCBs due for conversion are likely to default this year. Rupee depreciation and falling stock prices have increased the default risk.
In order to avoid default, some corporates have restructured the FCCB debt or have gone in for a re-finance at higher rates. However, companies, which have a stretched balance sheet and also liquidity issues, are under significant pressure. True, that FCCBs are cheaper financing options in the hands of companies. However, the benefit of the cheaper cost should also be viewed in the context of uncertainty in the forex rates (if the exposure is un-hedged). Else the low cost debt benefit can be completely wiped off leaving the company on the verge of default in testing times.
In order to avoid default, some corporates have restructured the FCCB debt or have gone in for a re-finance at higher rates. However, companies, which have a stretched balance sheet and also liquidity issues, are under significant pressure. True, that FCCBs are cheaper financing options in the hands of companies. However, the benefit of the cheaper cost should also be viewed in the context of uncertainty in the forex rates (if the exposure is un-hedged). Else the low cost debt benefit can be completely wiped off leaving the company on the verge of default in testing times.
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