Tata Motors’ FCCB Is No Big Burden

Before the global economic slowdown hit the markets, the period between 2006 and 2008 saw many companies issuing foreign currency convertible bonds (FCCBs). During that time, the rupee was trading in the 40s and most companies were seeing a phase of growth so that they were highly optimistic about future earnings and performance.

Tata Motors was one of these companies and had issued the debt when the rupee was priced at 42 against the dollar. Little did the issuers know that this assumed-to-be cheaper funding option would turn highly expensive in the near future. The companies expected their share prices to rise and for the bond-holders to convert their holding to equity.

In July 2008, Tata Motors raised USD 490 million through FCCBs with a conversion price of Rs 960.96 with maturity date of June 12, 2012. Considering a 1:5 stock split in 2011 and the current market price of Rs 238, the value has appreciated enough for investors to carry out a conversion. But with the 30 per cent depreciation seen in the rupee over the last two years, these benefits get wiped out, thereby leaving investors to seek redemption in cash. This would put the company under pressure to wiggle funds to meet its repayment obligations. Moreover, the depreciated value of the rupee would demand an additional cost during redemption.

However, according to reports, the company doesn’t have any major fund-raising plans at the moment. Their reserves, cash flows and internal accruals would be enough to take care of these payments. But some views suggest that the firm would require a fresh issue of debt to cover the FCCB maturity. In this case as well, the company’s debt equity ratio was at a healthy 0.79 as of March 31, 2011.

In any case, we feel, considering the ability of Tata Motors to repay the debt or issue new debt, the FCCB factor wouldn’t take much of a toll on the liquidity, leverage or the profitability of the firm.