Is JPMorgan Doing A Bain To FSL?

The gory story of FCCB mishaps is not pretty and of late there’s been a tiny revival.

FSL has just filed EGM for a possible raise with JPM as an advisor, and we see stock moving up 30% in last 15 days. JPM was incidentally also the advisor to Genpact-Bain deal and that deal got Genpact $3.3 Bn valuation. That, and newsflow from the space got us out from the earlier gloomy stance.

Roadkills

Hardly a word needs to be spent on those who got pulped, and their businesses (or corporate governance) that always had reputation.

Tulip Telecom

$97 Mn FCCB due in August this year. Defaulted and sought an extension to deadline.


Zenith Infotech

FCCB Redemption amount of $45 Mn due in August this year. It defaulted.

Karuturi Global




FCCB issue of $59 Mn due in October this year. Restructured to pay back the amount after a year with an additional 7% interest rate.

Came out of it – The creditors converted

Pidilite Industries – Issued FCCBs worth $40 Mn in 2007 with outstanding amount of $37 Mn this year and an additional redemption premium of $52 Mn thus amounting to repayment of $89 Mn. Conversion price was R102 and the CMP stands at R210 thus making the conversion feasible and so have the bondholders opted for it.

Rolled over

1) Tata Steel – FCCBs due worth $471 Mn this year and upon non receipt of conversion notice to the company, Tata Steel redeemed the bonds by the mechanism of CARS on September 5. CARS refer to Comprehensive rating for CDFI (community development financial institution).
2) JP Associates – Repayment amount of $534 Mn due this year, which was financed through issue of new FCCBs of $150 Mn and rest was paid through internal accruals and thus cleared the debt.
3) Orchid Chemicals – Redeems FCCBs by way of ECB and internal accruals.
4) Rolta India – Redeems the foreign bonds through ECB.
5) Strides Arcolab – After buying back FCCBs worth $20 Mn post issuance in 2007, the company redeemed the bonds in full by utilizing its cash accruals to the tune of $116 Mn.


Rolling Over - Suzlon

• At the start of the year, the total FCCB outstanding was $880 Mn out of which $569 Mn(65% of total FCCB obligation) worth of FCCB’s are due for redemption during the current year(FY 13).
• The company redeemed FCCB’s worth of $360 Mn, close to 65% of the total FCCB obligation of the current year, through sale of non-critical assets, internal accruals and the new facilities from senior secured lenders in Q1FY13
• The outstanding FCCB repayment, due in Oct, is $208.69Mn
• Current cash positions, as on 30th June, 2012, are Rs.455 Cr standalone and Rs1372 Cr consolidated.
• The company recently announced that the sale of their Chinese manufacturing unit for around $60Mn will help in repaying its FCCBs
• Bondholders have been requested for a four month extension of October FCCBs to allow the company to close various financing measures and drive alignment between all stakeholders on allocation of cash resources.

Case of FSL – Will it or wont it


FSL has been drubbed into ground, with the stock price lying at R5.5, that means a market cap of R220 Cr. That, of a company with 25000 employees, R2254 Cr last year’s revenue, long list of institutional investors and a large delivery platform built with a series of acquisitions, all lost for a rupee depreciation.

Going by the news flow on the recent transaction space - in July, Sutherland Global Services was set to acquire Apollo Health Street - a healthcare BPO arm of APollo Hospitals for R875 Cr, Hutchison Global Services (telecom BPO) was up for sale, TA Associate is acquiring controlling stake in Omega Healthcare (healthcare BPO) for R530 Cr and Infosys BPO is out in the market for acquisitions.

A big deal in the space is of Bain Capital buying 30% stake in Genpact from General Atlantic which is predicted to be valued at around $1 Bn. (valuations)

FSL should not find it difficult to make a case for itself especially with

1. ICICI combined stakeholding (19.86%)
2. Temasek (Singapore sovereign fund) (18.8%)
3. Metavante (18.2%)

Still holding large stakes.


The Business

FSL aggressively went for inorganic growth starting from acquiring “Customer Asset India” in 2002 to enter BPO business with credible platform and high quality client base, following by acquiring US based “FirstRing Inc” that added credit card service capabilities.
In 2004, it acquired “Pipal Research” which was eventually sold to CRISIL. Same year it acquired “Account Solutions Group” which gave access to collections and accounts recoverable market in the US as well as to a strong and blue chip client base.
From 2005 on it started diversifying from highly concentrated BFSI to Healthcare with “RevIT” systems. In March 2006, the company entered into a strategic partnership with “Metavante”, a subsidiary of the Marshall & Ilsley Corporation.

December 2006 Firstsouce Solution acquired Business Process Management Inc and in August 2007, The Company acquired US-based MedAssist Holding for $330 million (R1,353 Cr).

That was as the world moved closer to the credit crisis, the last act of biting bigger than can chew.

You can give to the management that top line growth strategies they pursued are a success.

The integration pressures bringing down margins and US backlash against outsourcing is reflected in the compressed valuations we see. But the fact remains that they built a large business.

Rupee Depreciation Got Them All

I think Edelweiss got to the crux of the issue with this graph. It’s all about unhedged currency position. Nobody could imagine a 50% depreciation in rupee and what that would do to their liabilities. Least of all FSL, issued at a rate of 39 USD/INR. In fact it has been argued that the current short fall of around $85 Mn matches the added liability due to rupee depreciation.

So we look at the business, platform, investors and recently appointed advisor to the deal – JPM, “to explore new options for consideration of the Board” with regards to the FCCB redemption. Add to that, J.P Morgan was also the advisor in the Genpact-Bain Capital deal and we’ve a picture emerging.

FCCB Turnaround – A Trade on Integrity

From all the cases above, one thing that is clear is, some took the money because it was needed and some because it was available. Now when the time comes to payback, some will payback because they can and they would while others would play possum.

For the shrewd trader, there’s money in looking beyond the overdone fear and expect dramatic turnarounds in some of them.

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