Oct 11, 1999|
Reliance Petroleum converts FCCBs into GDRs
According to newspaper reports, Reliance Petroleum has gone in for a 'forced conversion' of its foreign currency convertible bonds (FCCB) into global depository receipts (GDR). The conversion is to take place at a price of US$ 5 per GDR (1 GDR = 15 shares). The GDRs are to be listed at the Luxembourg Stock Exchange.
RPL has set up the world's largest single location refinery having a capacity of 27 m tonnes per annum, at a cost of Rs 142.5 bn.
The decision to convert the FCCBs into GDRs is likely to benefit the company in several ways:
It will save interest cost, amounting to approximately US$ 8 m per annum, resulting in higher profitability.
The inflation of debt (principal and servicing costs) due to the depreciation of the Indian rupee will be no longer valid
The company's debt equity ratio will improve to 0.9:1 as the debt is being converted to equity
Its listing on an international exchange will give it access to larger markets in sourcing funding needs in the future.
The conversion has been effected at a price of Rs 15 per share, which is at a steep discount to the domestic price of Rs 52 per share. Thus, the existing shareholders of the company are likely to lose out as a result of this deal (equity dilution). The US$ 100 m debt and a US$ 8 m per year, are a small portion of the company's overall debt (Rs XXXX) and servicing costs (Rs XXXXX) and as a result the conversion will make no significant alteration in RPL's balance sheet structure.
RPL's advantage of size, product mix and marketing ability has led the analysts to rate the stock as a 'BUY'. The product mix is in favor of light distillate, LPG and diesel, all of which have high demand growth. The company plans to market a third of its production to group companies, thus providing it with a ready market.
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