JSW Steel Ltd on Thursday said it had redeemed foreign currency convertible bonds (FCCBs) worth $274 million (Rs 1,573 crore). With full payment, no equity dilution took place but analysts said the interest costs would go up.
The FCCBs, which matured yesterday, were issued in 2007 to fund the expansion at its Vijayanagar (at Bellary in Karnataka) project. The company had redeemed these at 142.8 per cent of the principal amount due of $274.4 million. After adding the premium, the total payment to bondholders was $391.8 million (Rs 2,247 crore). Else, the company said, there would have been an issue of 11.6 million shares of Rs 10 each, arising out of conversion of the FCCBs.
In 2007, when it had raised the money, the rupee was 40.3 to a dollar; it is now above 55. So, it paid a total of Rs 2,155 crore against the raised Rs 1,107 crore. Therefore, the effective cost of the debt, according to Nemkumar and Gopal Ritolia, analysts with India Infoline Ltd Research, was 14.3 per cent.
Due to the rupee depreciation and replacing the FCCB debt with a domestic one, they said the interest burden on the company would go up by Rs 258.6 crore. This means the cost of the FCCBs, earlier thought to be a cheaper option to raise money, had turned out to be expensive. The yield-to-maturity at the time of the FCCB issue was 7.4 per cent, which at redemption had climbed to 14.3 per cent.
Nemkumar and Ritolia fadded, "According to Indian GAAP (Generally Accepted Accounting Principles), redemption premium can be directly adjusted against reserves. On redemption, total shareholders' funds would decrease by the redemption amount and debt would increase by the same amount. Hence, debt:equity ratios would worsen."
They said JSW's debt:equity ratio was 0.95:1, to now go up marginally to 1.03:1.
Nemkumar in a report on June 5 wrote, "Replacement of FCCB with domestic debt would marginally increase net debt/equity, but leverage would be at a comfortable level. We expect a 8.3 per cent /11.5 per cent negative impact on FY13/FY14 reported EPS (earnings per share)."
JSW Steel did not respond to emailed queries. In February, the company had decided to raise $275 mn through foreign markets to pay for these FCCBs. The external commercial borrowing (ECB) had an over-allotment option of $75 mn and the interest rate was an attractive Libor-plus four per cent annually. This was a five-year ECB and investors had the option of converting the bonds into equity. The conversion price for this ECB is set at Rs 892.99 per share.