Foreign Currency Convertible Bond Wockhardt Case

Presented By, Group 2

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FCCB - Its different!

Equity Immediate equity dilution Dividend distribution

Debt
High interest or Coupon rate ECB limited to Capital goods, capacity augmentation, overseas acquisitions

FCCB Low coupon/interest compared to debt No immediate dilution of equity No cash payment in good market All transactions in foreign currency

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Big Indian Players of FCCB Game

Company Maturity Period Issue Size (Mn)

Conversion price at maturity (Rs)

Share price as on Sept 18,2009

Aurbindo Pharma Bajaj Hindusthan Moser Baer Wockhardt Ranbaxy Reliance Communication

May,2011 Feb, 2011 Jun, 2012 Sept,2009 Mar,2011 May,2011

150 USD 120 USD 75 USD 110 USD 440 USD 500 USD

1014 465 546 486 716 476

677.05 181.15 91.40 174.35 360.10 306.60

Tata Chemicals
Tata Motors
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Jan, 2010
Jun, 2012

150 USD
450 USD
FCCB - Wockhardt Case

231
961

268.80
598.95
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Win -Win Proposition

FCCBs

Capital in $

Benefits to Issuer
FCCB can be raised in a month usually and thus takes lesser time. Low overseas interest rate Credit rating is not mandatory, since bonds are issued by top corporate having excellent track record. Low cost means of financing

Benefits to Investor
Help to diversify their portfolio Find better option to invest in emerging markets like India If share price goes up benefit from the capital appreciation Assured of fixed return and capital appreciation.
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Guidelines 2004 Companies 80% revenue must come from following operations Entertainment Software

Pharmaceutical
Biotechnology Any other as specified by Government

Company can issue FCCB only up to 51% of its issued & subscribed capital
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Guidelines 2009 Company can issue FCCB only up to value of USD 500 million in a single year Should be listed on BSE and NSE

Minimum net worth during the previous three

years should not be less than 500 crore

Minimum average maturity shall be 5 years for

borrowing more than US $20 million
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Wockhardt An Introduction
Wockhardt is a global pharmaceutical and biotechnology company Most part of its revenues comes from Europe and

the United States

Wockhardt market presence covers formulations,

biopharmaceuticals, nutrition products, vaccines

and active pharmaceutical ingredients
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Wockhardt Case Need of FCCB

Fund Invested in Acquisition : 2100 crore Wockhardt acquire following companies :
CP Pharmaceuticals of UK

Esparma of Germany
Irish firm Pinewood Laboratories Dumex India Pvt. Ltd. Negma Labs of France Morton Grove Pharmaceuticals of US
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Reasons for Acquisition

To gain access to the generic drug To gain access to the markets of European Union Acquisitions of intellectual property and

technological capabilities
To achieve the corporate objective of $ 1 billion

turnover by 2009
Setup of a SEZ near Aurangabad, Maharashtra
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Reasons & Risks

Reasons for FCCB
Market was bullish expectation of Market price to raise is high Rupee getting stronger at that time

Risks in FCCB
FCCB loan is Redeemable at 129% on Maturity Date Exchange Difference is uncertain in nature

Low coupon rate

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FCCB Option By Wockhardt

Convertibility of each bond into 94.265 fully paid

equity shares with par value of Rs.5

Conversion Cost = Rs. 486.075 (Rs.5 * 94.265)

Convertible by the holders at any time on or after 24

November, 2004 but prior to close of business on 25 September,2009

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FCCB Option By Wockhardt

Redeemable in whole but not in part, at the option of

the Company at any time on or after 25 October,

2007 but not less than seven days prior to maturity date i.e. 25 October, 2009 Redeemable on maturity date at 129.578 percent of its principal amount, if not redeemed or converted earlier

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Factors leading to CDR

Spend $450mn in buyout & revenue growth was less than $300mn Low response to IPO leads to withdrawn IPO

2008 crisis limits the growth with increasing cost

of production

Debt crisis leads to issue FCCB of $108mn

Increase its liability to 3700 crore in total
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Factors leading to CDR

Wockhardt, to repay its liability take shelter under CDR option Company sale Assets of Worth Rs 790 crore to

repay priority loans

Wockhardt divest some of its business incl.

pinewood, Negma, Esparma

Credit Rating Companies reduce its rating
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Factors leading to CDR

Companies debt increased by 900 crore and stands at 3.75 times of its equity Wockhardt sale 10 hospitals which contribute

85% of chains revenue to Fortis Healthcare

ICICI is the leading Bank to support Wockhardt

in 2009

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Terms of CDR
Bondholders are offered Buy Back at 65% haircut of conversion price Exchange Bonds for Preference shares which

partly convertible in 2015 & partly in 2018

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Wockhardt Settlement in 2009

Paid Rs. 115 crore in April, 2010 Paid Rs. 85 crore in December, 2011 Paid Rs. 30 crore in January, 2012

Paid Rs. 100 crore in March, 2012

Paid Rs. 50 crore in June, 2012

Paid Rs. 130 crore on 31st August, 2012

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Learning from Wockhardt

Any bond issuer should maintain a redemption reserve in the event of investors claims Embedded call option in the bonds gives the

issuer the right to call them back anytime

Adequate margins should be placed for derivative

products to avoid automatic square off

Avoid over leveraging
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Learning from Wockhardt

Risk aversion strategies in forex derivative products should be implemented Consolidate ones position before going into

rampant acquisitions
More importance to economic environment

Maintain Proper risk management policy to

manage Forex risk and derivative risk exposure
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