JSW steel to raise ECB loan to absolve FCCB liability

JSW Steel, one of the biggest integrated steel players in India, has laid out what seems like a final plan to redeem its outstanding FCCB loan of USD 274.4 million. The company will raise up to USD 275 million through overseas borrowings with a ‘green shoe’ option attached. The ECB will be utilized for one of more of the following reasons viz. buyback of outstanding foreign currency convertible bonds (FCCBs), redemption of outstanding FCCBs and capital expenditure.

The company, in 2007-08, had issued 3,250 foreign currency convertible bonds (FCCBs) of USD 1 lakh each to fund an expansion plan at its Vijaynagar plant. Out of the total FCCBs, eight bonds got converted and 498 bonds were repurchased. Therefore a total of number of 2,744 FCCBs remain outstanding for conversion before June 21, 2012. This would lead to a dilution of 6.7 per cent on the existing share capital.

The stock price in the last one month has rallied on the back of positive news on the iron ore front and the decent December quarter result reported by the company. With its CMP of Rs 865 and the conversion price fixed at Rs 953 we believe that debenture holders will not opt for conversion as it does not provide any gains to the holders. Therefore, by opting for redemption, holders will get an amount 142 per cent higher than the principal value and after which they still have the option of buying it at a later date if required in the secondary market.

For the company the redemption of these bonds multiplied by 142 per cent of the principal amount (which is Rs 1,411 crore) will result in a total outflow of Rs 2,004 crore. Therefore it will lead the company to shed around Rs 600 crore from its own coffers.

This means that JSW Steel would be borrowing USD 200 million through ECBs with the option of conversion into equity and can increase it further by USD 75 million if the response from the investing fraternity is better than expected. The company has kept the conversion price of loan into equity shares at Rs 892.99 apiece, which is 10 per cent above the floor price. As per the media news the ECB will be raised at 5.1%. We believe that the funds raised through ECBs will continue to put pressure on the balance-sheet and the profitability of the company.