Page 70 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 4: Eurocurrency Markets

converted to equity or Depository Receipts after a specific period. In India, conversion of a Fully Notes
Convertible Debenture of a Partially Convertible Debenture is forced, since the conversion date
and price are fixed in advance. However, in case of FCCBs, the holder has the option of converting
them into equity (normally at a predetermined exchange rate), or retaining the bond.
Because of this facility, FCCBs carry a lower rate of interest than the rate on any other similar
non-convertible debt instrument. FCCBs are freely tradable and the issuer has no control over
the transfer mechanism, since, like GDRs, they are bearer securities, with no registration of
owners. However, Convertible Bonds issuance is concentrated only in a few currencies.
Of the major currencies, the US dollar accounts for more than half the issuance of FCCBs. The
British pound sterling, French franc and Japanese yen together account for around a quarter of
the current outstandings in global markets, but they are primarily for domestic markets and
attract very little international interest. The Swiss franc is an important niche market, accounting
for more than 10 per cent of the outstanding issuance and offers low coupon structures, especially
for relatively small amounts and for Asian issuers.
Convertibles are more beneficial for the issuer than a GDR because of the following
characteristics:

(i) They have a lower coupon than straight debt.
(ii) They provide a broader investor base, i.e., both, those who invest in debt as well as in
equity.

(iii) They allow a higher premium to the issuer than a GDR.
(iv) Dilution of equity is not immediate, but deferred.
The disadvantages of convertibles when compared to GDRs are the need for debt servicing in
foreign currency and the exchange risks associated with it and to leverage before conversion.

4.5.2 Pure Euro Debt

Pure Euro Debt is generally raised through Syndicated Loans or Private Placements. Very few
Indian companies have issued Euro debt to the general public. The reasons for this are the higher
cost of raising funds (when compared to Syndicated Loans or Private Placement) as well as
servicing the debt and the exchange risk associated with the payments. Also, very few investors
would be interested in investing in an Indian company, which would be graded very low, in
spite of the higher coupon offered to them.
In Syndicated Loans, the company which wishes to raise funds, appoints a Lead Manager and it
is the responsibility of the Lead Manager to form a syndicate of banks and/or other Financial
Institutions (FIs) who combine to raise the amount needed by the company.
For instance, The Tata Iron and Steel Company (TISCO) raised a loan of $150 million recently in
March, 1997, wherein the Lead Managers were State Bank of India, ANZ Grindlays Bank and
HSBC Markets, who, among themselves contributed only $6.5 million and the rest was contributed
by a syndicate of 21 other banks, which was formed by the managers.
Syndicated Loans are usually given at a floating rate of interest, where the 3 or 6 months LIBOR
is taken as the benchmark and the interest is fixed at certain basis points above this rate. The
tenors can extend up to 10 years and repayment is fixed in any profile bullet or amortising. No
listing is required. The loan may be secured or unsecured. These loans are typically given by
banks and are not traded in the capital markets.

LOVELY PROFESSIONAL UNIVERSITY 65