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Slowdown in FCCB issues likely
July, 12th 2006

Indian corporates, which have been aggressively raising money through foreign currency convertible bonds (FCCBs) in the first five months of the year, are likely to go slow until September.

Also, premiums on these issues, which have been in the range of 50%, are likely to come down. This is even as Indian corporates are looking to tap markets for raising money through hybrid issuances.

In an interview with ET, Viswas Raghavan, managing director and head of debt and equity capital markets, JP Morgan, said, Liquidity continues to be extremely robust.

However, there is some sensitivity around valuations. The summer recess is usually quiet and may have begun a bit early this year. Come September, we expect investors and liquidity to return, but selectivity around deals will continue. Mr Raghavan is currently the senior-most Indian at JP Morgan. He joined JP Morgan in 00 from Lehman Brothers. He adds that in the equity-linked market, investors are still keen to invest but will be less inclined to buy super-high premium convertible structures.

Further, some transactions this year have been aggressively priced, resulting in principal erosion, thus increasing investor selectivity around participation in new issues. He also feels that India would see hybrid issues from both banks and corporates. Banks like UTI Bank are awaiting clearance from RBI for an overseas hybrid issue. There is a huge market for hybrid issues in Europe. These securities qualify as core capital for banks.

RBI is looking at hybrid structures and if some of these are cleared, a host of banks could look at this market. There is a similar market for corporates too. We are seeing interest from well-known blue chip Indian corporates to tap this market, said Mr Raghavan.

However, corporates will need to go in for a credit rating before hitting this market. Also, deal sizes in this market is likely to be in the range of $200-500m .

Indian corporates have been raising money aggressively from the FCCB markets and have raised $2.4bn in 04 and $3.5bn in 05. They have already raised around $3.9bn in 06. Most of the FCCB issuances this year have been before May when the market went on a tailspin.

Indian corporates have been raising FCCBs at premium levels of around 50-60%. These premiums were higher than that charged by corporates in other Asian countries. These premiums are now likely to come down to around 30% levels.

Adds Mr Raghavan, In terms of expected volumes, the equity-linked market has traditionally benefited from increasing volatility and a rising interest rate environment. Hence, the prognosis for supply looks good as long as the new issues are sensibly structured and priced.

He feels interest rates are likely to rise further and they would move by at least another 50bps from the current levels by the end of the year.

With the market now weak, a host of these FCCB issues from India are trading below par in the secondary markets. Some of the issues that have been badly affected include Sical Logistics and Punj Lloyd. Most of them have also been affected because of the sharp drop in share prices from the highs early this year. 

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