The FCCB issue

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If FCCBs offer advantages to both lenders and borrowers, why did they run into trouble during the credit crisis?

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FCCBs were also a cause for the battering that stocks of some highly leveraged companies received last year. So what are FCCBs and how do they impact companies you invest in?

What is an FCCB?

FCCB is a foreign currency-denominated bond issued by an Indian company. The bondholder can either convert the bond into a fixed number of equity shares in the company (the price is preset) or give up the conversion option and retain it as a bond; in which case, it will be repaid at maturity.

If the market price of the stock, at a future date, manages to rise past the "conversion price" for the bond, the bondholders may grab the option to switch to equity shares.

FCCBs are usually issued with the expectation that the company's stock price will continue to rise with profits. However, if that does not happen and the conversion does not go through, these bonds are to be retired at a premium over their face value.

Consider the FCCB issue of Suzlon Energy. The company issued a zero coupon FCCB with June 2012 as redemption date. However, these zero coupon bonds would be redeemed at 150.24 per cent of the principal amount if the bond does not get converted into equity.

What went wrong?

If FCCBs offer advantages to both lenders and borrowers, why did they run into trouble during the credit crisis? Simply because the prices dropped heavily and became unattractive for conversion into shares.

For instance, Subex's FCCB initially had a conversion price of Rs 656.2 as against the current price of Rs 64 (as a result of the 2008 correction). At the same time, the due dates of these bonds were fast approaching conversion.

Now, if the companies are forced to repay on due date, they would have to pay a premium on such redemption. However, some companies did not put away a sum as premium redemption reserve, believing that their bonds would be converted into shares.

To make matters worse, fall in rupee inflated the oustanding loan amount and interest payouts. The company's ability to service its debt/repay its debt is a key indicator of its financial health.

In the 2008-09 financial scenario, quite a few companies were at risk of committing default if they did not restructure their FCCB terms. This was the key reason why companies with FCCBs due for redemption were beaten down by the market.

Given the 2008 crisis, companies were allowed to either pre-pay FCCBs or restructure them by replacing with new set of FCCBs having lower conversion price (which would involve issuing more shares causing equity dilution). The RBI also allowed them to pre-pay debt by raising external resources and extended the time-frame for such pre-payment to December 2009.

In the case of Subex, the company resorted to revision of conversion price toRs 80.31 from Rs 656.2 to bring it closer to the current market price.

While companies such as Reliance Communication and Financial Technologies took the prepayment route by paying part of their debt at a discount, Suzlon, Aurobindo Pharma and Subex are some instances where the companies drastically cut the conversion price.

Companies whose FCCB redemption did not fall within, say, the next two years, remained neutral and did not resort to restructuring.

So what does this mean for investors? If the company you are investing in has outstanding FCCBs, look at the following:

Has the stock price remained far below the conversion price? If so, what would be the interest outgo on the FCCBs and would that affect profitability?

FCCB, until converted, is a debt. Hence, when looking at the debt:equity position, or leverage, do not assume that the bonds will be converted.

If the FCCBs are being converted into shares in tranches, what would be the ultimate equity expansion and would it dilute earnings?

For what are the FCCB funds being utilised? If they are being used effectively for expansion purpose, chances are that any equity expansion (on conversion) would be compensated by earnings expansion.

How and What to Look into Annual Reports

How  to Look into Annual Reports?

The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors.

Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management's outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.

The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:

The director's report, which will detail the company's operational performance in the year gone by.

Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.

Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor's report.

The basics, for starters

You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director's report. This will give you an overview of the co mpany's performance across various segments and an idea of the factors that drove performance.

If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks' management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.

Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.

Between the director's report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.

For number-crunchers

For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.

The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute "other income", particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.

Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.

The annual report also discloses the financial information of the company's subsidiaries, besides providing financials on a consolidated basis.

As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.

Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.

Also look for the auditor's qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.

Nooks and corners

The annual report also contains little nuggets of information that could provide you with additional insight into the company.

Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.

The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.

Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.

IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.

Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company's desire to leverage its balance shee t.

Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India's latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.

This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.

Economy Double Dip

This i have taken from seeking alpha website. From it one can make a small guess where our economy can head in coming days

THE ZEN OF SARCASM

1. Do not walk behind me, for I may not lead. Do not walk ahead of me, for I may not follow. Do not walk beside me either. Just pretty much leave me alone.

2. The journey of a thousand miles begins with a broken fan belt and leaky tire.

3. It's always darkest before dawn. So if you're going to steal your neighbor's newspaper, that's the time to do it.

4. Don't be irreplaceable. If you can't be replaced, you can't be promoted.

5. Always remember that you're unique. Just like everyone else.

6. Never test the depth of the water with both feet.

7. If you think nobody cares if you're alive, try not filing your taxes.

8. Before you criticize someone, you should walk a mile in their shoes. That way, when you criticize them, you're a mile away and you have their shoes.

9. If at first you don't succeed, skydiving is probably not for you.

10. Give a man a fish and he will eat for a day. Teach him how to fish, and he will sit in a boat and drink beer all day.

11. If you lend someone $20 and never see that person again, it was a wise investment.

12 . If you tell the truth, you don't have to remember anything.

13. If you keep on doin' what you're doin', what you've got is all you'll ever get.

14. Everyone seems normal until you get to know them.

15. The safest way to double your money is to fold it in half and put it back in your pocket.

16. A closed mouth gathers no foot.

17. There are two theories about how to argue with women. Neither one works.

18. Nobody can talk and learn at the same time.

19. Experience is something you don't get until just after you need it.

20. Youth is wasted on the young.

Explaination of Rights Offerings

Here is the nice explanation on Rights Issue picked from a website

Rights Offerings

An often overlooked means of raising new capital is through a rights offerings or rights issuance. Rights issues occur when a firm sells new shares to those investors who have "rights." Rights give their holders the right to buy the new shares at the subscription price. To see how these work, an example is necessary.

The first step is to determine how much the firm needs to raise. For our example suppose a firm needs to raise $50 million dollars. Currently they have 22 million shares outstanding at a price of $25 a share. The next step is to determine a subscription price. The subscription price is the price at which the rights holders purchase the new shares. In this case let the subscription price be $15/share.

In the United States it is common to give a right for each share. So there will be 22 million rights granted. How many shares must you sell?

Number of new shares = (Amount you need to raise) / (subscription price)

So in this case:

$50,000,000/$15=3,333,334 new shares

How many rights will be needed to buy a single new share?

(Number of rights granted) / (Number of shares being sold)

22,000,000 / 3,333,334

6.6 rights / new share

The next logical question is what each right is worth. Unfortunately that is not quite as easy to answer. The first thing that must be done is to calculate the price of the stock after the issue and after the new shares have been sold. To do this we make some assumptions. Notably we assume that the everyone will exercise their rights (we can relax this later but it is generally a very good assumption), and more importantly that the investment opportunities will not change and further that the rights issuance does not change the operations of the firm. If this is true, then pricing is quite simple:

Overall equity value after issuance = Equity value before issuance + amount raised

= (shares * Price) + amount raised

= 22,000,000* $25 + $50,000,000

= $600,000,000



Total number of shares (post issuance)

Number of shares outstanding before the issuance + new shares issued

22,000,000 + 3,333,334

25,333,334

Price per share = new total market value / new number of shares

= $600,000,000 / 25,333,334

= $23.68

Now we can calculate the value of each right.

New price = subscription price + [(number of rights needed) * ( value of each right)]

$ 23.68 = $15.00 + [( 6.6) * (value of each right)]

Solve for the value of each right

Right = $1.315

Note that ex-right price plus value of right = old stock price.

23.68 + 1.315 = 24.995= $25.00

This can also be found by

Right price = (Old price - subscription price) / (number of rights per new share + 1)

=($25.00 - 15.00) / (6.6 + 1)

=($10.00)/(7.6)

= $1.315

If these rights are deemed as transferable, they can be sold on the secondary market. Most rights offerings involve transferable rights.


Link where we can get some more information
http://tutor2u.net/business/finance/finance_sources_equity_rights.asp