The Lost Deal: Sakthi Sugars FCCBs

Asset: Sakthi Sugars Ltd

Investors: Deutsche Bank London, Apollo Asia Opportunity Alpha (Mauritius), Third Avenue Global Value (Master) Fund LP, JP Morgan Mauritius Holdings Ltd, Goldman Sachs Investments (Mauritius) I Ltd, Morgan Stanley Mauritius Company Ltd.

Loss: 50%-60%

Sakti Sugars is just the one example of companies defaulting on their FCCBs. Most of these were issued in the heydays of the market and expected to expire in the next 3 years.

Mint carried an article on these companies in September. The article revealed many companies which were trading 50%-70% off the conversion price.

Biggest name on that list is Reliance Communications, which had issued $1.5bn of FCCBs with a conversion price of Rs. 661 a share. Current market price of the stock is Rs. 181. In cases of big companies, though, the chances of default are much lower because they will be able to replace these bonds in the current environment. It is the smaller companies that will cause the most damage. Whatever the route they take to resolve this issue, unless the stock prices rise substantially, most of these funds are going to suffer significant losses on their investments.

The most striking part in this story is that the holders of the FCCBs are not your normal passive institutions like pension funds and endowment funds. In case of Sakti Sugars, these are the more sophisticated funds around, the big names of the deal market.

In May 2006, Sakthi Sugars Ltd, the company had issued FCCBs worth $60mn worth to set up two co-generation plants and a green-field sugar mill near Erode. The FCCBs were issued in 2 tranches; $20 mn Series A bonds with maturity of 3 years and $40 mn Series B bonds with maturity of 5 years, including greenshoe option upto 20%. Series A bonds expired in May 2009 and it defaulted on the bonds. Sakthi Sugars entered into a Restructuring Agreement with the lenders on June 29, 2009, to restructure its debts under the corporate debt restructuring scheme announced by Reserve Bank of India. As a part of that restructuring agreement, it has converted the following FCCBs to equity shares.

Company will announce more conversions on 23rd January board meeting.

In all, the company has so far allotted 45.7 lakh equity shares on conversion of $20.1 million worth FCCBs. These investors will hold around 12.72% in the paid up capital of the company. Average price of the conversions have been close to Rs. 200, while the stock is trading near Rs. 85. It has $40 mn worth of FCCBs still to take care of. It has received board approval to raise its debt to Rs.1500 crore.

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