>SUBEX FCCB RESTRUCTURING REPORT

SUBEX Ltd has offered its bondholders an exchange offer, whereby new bonds will be issued at a 30% discount to the face value. Assuming investors accept the new terms, the principal amount outstanding on the bonds would come down to $126 million. Bondholders will be compensated via an increase in the interest coupon, from 2% for the existing bonds to 5% for the new bonds. More importantly, the conversion price has been set at Rs. 80.31, a fraction of the original
conversion price. The details of the new bonds are based on announcements by the company to London Stock Exchange, where the bonds are listed. According to a LSE filing, due to the lower conversion price, “the new bonds are more likely to be converted into shares of the company, and thereby further reduce the debt obligations of the company when the new bonds fall due for redemption”. From a bondholder’s perspective, the new terms make immense sense. But from the perspective of Subex’s existing shareholders, the conversion of bonds into shares will lead to
a trebling of the company’s equity base from the current level of 34.8 million shares. If all the bonds are converted based on the new terms, 72.2 million new shares would have to be issued. For perspective, Subash Menon and his associates own 12.84% of the company currently. Upon full conversion of the new bonds, their holding will drop to around 4%. Of course, bondholders will convert the debt into equity only if the company’s performance picks up, and they have the
certainty that the share price is sustainable well above the conversion price of Rs. 80.31. Else, they’d just prefer not to convert and demand redemption instead. If that’s the outcome, Subex could be strapped for cash to pay its bondholders. Either way, the company needs to post a sharp rise in profit to avoid a debt trap.