While markets are at lifetime high, about 12 companies with outstanding foreign currency convertible bonds (FCCBs) of $1.8 billion may face redemption pressure as shares of these companies trade below the conversion price. Bondholders prefer to redeem these bonds instead of converting them into equities when prices are below the conversion price.
However, experts feel well-governed companies should be able to pay off their debt. “While well-governed companies typically make provisions for FCCBs in balance sheet, companies with aggressive accounting practices do not treat FCCBs as debt until bondholders make the claim after the failure to convert. As has been seen in the past, well-governed companies are able to service the FCCB debts, while defaults happen in companies that haven’t given this quasi-debt a conservative treatment,” said Deep Mukherjee, senior director, India Ratings & Research.