Amtek unit bondholders look to move UK courts
Castex’s bondholders say firm’s stock price was pushed up to force a conversion of FCCBs into equity shares
Amtek’s problems are likely to affect several auto makers, including Maruti Suzuki and Tata Motors. Photo: Bloomberg
Mumbai: Troubles are building up at Amtek Auto Ltd, with bondholders of its subsidiary Castex Technologies Ltd looking to approach UK courts alleging manipulation of the company’s stock price. The bondholders say the stock price was pushed up to force a conversion of foreign currency convertible bonds (FCCBs) into equity shares.
Last week, shares of Amtek Auto fell 57% in response to the stand-off between the company and its bondholders and on fears of a liquidity crunch at the Delhi-based auto component firm.Amtek Auto, which reported a net loss of Rs.157.6 crore for the quarter ended June 2015, admitted to a “temporary cash flow mismatch” in a statement to stock exchanges on Thursday, adding that promoters have infused fresh funds into the company.
The assurance, however, will do little to appease bondholders who are exploring legal action.
“As the bonds were issued under English Law, investors may ask the UK courts to decide if the conditions for the forced conversion have been properly met, if it is proved that the sudden stock price surge that triggered the conversion of bonds was manipulated. However, the manipulation part will have to be probed and decided by the local authorities, in this case Sebi (Securities and Exchange Board of India),” said Arup Ganguly, managing partner and head of the India team of KNG Securities, which is advising some of the bondholders of Castex Technologies. KNG Securities is a London-based brokerage active in issuance and trading of convertible bonds.
Repeated calls and emails to Amtek Auto officials, including chairman Arvind Dham, managing director Gautam Malhotra and chief financial officer Santosh Singhi went unanswered.
On 1 August, The Financial Express reported that bondholders have already approached Sebi and the stock exchanges, asking for a probe into the stock price movement of Castex Technologies.
How it all started
In April 2012, Castex Technologies issued $130 million in FCCBs, followed by $70 million in September 2012.
On 31 July, Castex Technologies informed stock exchanges that the company’s board had agreed to “mandatorily convert” $137.4 million of these oustanding bonds into equity shares. The conversion date has been set for 10 September 2015.
The notice of conversion came after the stock price went above a threshold level laid down as part of the FCCB issue. While FCCB issues do not typically have a clause of mandatory conversion, this one had.
“Both the convertible issues have embedded mandatory conversion features (i.e., conversion into equity at the option of the issuer) subject to the underlying stock price staying at or above specified thresholds after certain dates in the life of each bond,” said a note prepared by KNG Securities for some of the company’s bondholders. Mint has a copy of the note.
The note said for the mandatory conversion of one tranche of bonds bearing a coupon of 6%, the stock of Castex Technologies must exceed Rs.171.08 for 30 consecutive trading days. For the conversion of a second tranche of bonds bearing a coupon of 2.5%, the stock price had to exceed Rs.153.36.
According to Bloomberg data, the stock gained 127% until 27 May when it breached the conversion limit of Rs.171.08 and then continued to trade above that price until 31 July, when it hit a high of Rs.361.85 per share. After that, the stock fell for 29 consecutive days, hitting the lower circuit of 5% each day. On Friday, Castex shares closed at Rs.82.15 per share.
In letters sent to the stock exchanges, bondholders have questioned this steep rise in the stock price.
NSE confirmed that it had received a communication from the bondholders while BSE declined to comment.
According to Anand Desai, managing partner, DSK Legal, convertible debt transactions can have a so-called hurdle rate (share price crossing a certain threshold) which triggers a conversion. This assures investors who have subscribed to bonds at low coupon rates that they will benefit from an upside in the stock price, while allowing promoters to convert debt into equity when the company is doing well.
“However, if the share price is manipulated, such that the traded price is not a genuine market price, and the hurdle rate is crossed by insider trading or price manipulation, then Sebi can take action against those who manipulate the price. Further, courts can be approached by the investors who would have a cause of action as the share price has been manipulated to trigger conversion, and they cannot actually sell the shares at the higher price,” said Desai, adding that investors can approach UK courts if the investment agreement is governed by English law, as is the case in most FCCBs.
For the June 2015 quarter, Amtek Auto reported a net loss of Rs.157.6 crore. In the March ended quarter, the company had reported a profit of Rs.127.82 crore, while net profit in the comparable June 2014 quarter was Rs.223.17 crore. Net sales in the June 2015 quarter fell 18.4%.
The company did not provide consolidated financials. Its subsidiary Castex Technologies reported a net loss of Rs.105.58 crore for the quarter ended June compared to a net loss of Rs.47 crore in the previous quarter.
In a note issued to the stock exchanges on 21 August, Amtek attributed the losses—the first in 15 quarters, “to the current market scenario which caused decline in the sales and profit margins of the company”.
There is a temporary cash flow mismatch in the company and to mitigate the present situation, the promoters have already infused Rs.75 crore and if required in future will also infuse more funds, the company said. It added that it is also exploring various means of fund-raising.
While Amtek blames the market scenario, earnings of peer companies have not reflected similar weakness.
Net profit of auto ancillary firms among the BSE 500 firms rose by 17.92% toRs.934.28 crore, according to data from Capitaline. The gains came on the back of a strong order book from companies such as Maruti Suzuki India Ltd and subdued raw material prices.
According to an investment banker in Amtek Auto’s case, stress has built up due to an aggressive acquisition strategy pursued by the company.
Amtek Group has made 21 acquisitions in the last three years. “Such high debt levels are not sustainable in the auto component business,” he said, declining to be identified.
“It’s a domino effect—problems at one company (Castex) is pulling down the whole group. They aren’t left with too many options. They will have to take some drastic measures like restructuring the company to inject liquidity,” he said.
“There has been some opacity in some of their previous acquisitions,” said Amit Tandon, managing director at Institutional Investor Advisory Services (IIAS), a proxy advisory firm. “I now understand that the conversion issue has become contentious (in London) as there are discrepancies between the term sheet and the prospectus.”
Mint could not independently ascertain what these discrepancies are.
According to Capitaline, the consolidated debt of the group stands at Rs.16,064 crore as of March 2015. The data show that the interest coverage ratio of the group fell to 0.09 times as of the June ended quarter, compared to 2.24 times in the year-ago quarter.
The issues facing Amtek are likely to have an adverse impact on several auto makers, including Maruti Suzuki India Ltd, Tata Motors Ltd and Eicher Motors Ltd, as Amtek supplies them casting and forging parts.
Some clients, such as Maruti and Tata Motors, that are heavily dependent on Amtek for some critical parts have expressed concern to the firm, said three people familiar with the matter. All of them declined to be identified.
A Maruti Suzuki India spokesperson declined to comment for the story and an email sent to Tata Motors remained unanswered.