Subex Seeks Refinance

Indian revenue assurance vendor Subex has offered to exchange its US$180m of FCCBs for new US dollar denominated bonds. The original bonds had a 2% coupon with a due date of 2012. Because of the fall in Subex’s share price, the likelihood of conversion to equity is remote. The new bonds will have a coupon value of 5%, and will also fall due in 2012.

The official Subex announcement can be read here. The story is reported here and here.

What is not public is the full details of the offer to existing bond holders, which are only available in the ‘Exchange Offer Memorandum’. One guess is that the higher coupon value reflects an attempt to raise new capital from existing FCCB holders. This might be used to fund an acquisition. We shall have to wait and see how many of the existing bond holders agree to the deal and hence if Subex can solve its underlying problem: not generating sufficient cash from existing operations to be able to pay back on the current FCCBs. For Subex, this might be a case of double or quits… and it is up to the investors to decide whether to double up or quit whilst they are behind.

Update: Thanks to Atul Jain of TEOCO, who has posted a comment explaining more about the exchange and Subex’s reasons for offering it. In short, the deal would reduce Subex’s debt leverage and make it likelier that bond holders will convert their debt into equity.

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.   Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a founding member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group, and is an editorial advisor to Black Swan. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.   Commsrisk is edited by Eric. Look here for more about Eric's history as editor.
  • Atul Jain

    Q: What is the purpose of the Exchange Offer?

    A: The Exchange Offer reduces the principal amount of the Company’s debt obligations from US$ 180 million in respect of the Existing Bonds to up to US$ 126 million in respect of the New Bonds. This would enable the company to lower its leverage ratio, strengthen its balance sheet and be better positioned for future growth.

    The New Bonds will have a lower conversion price compare to the Existing Bonds, and is therefore 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.

    Q: What will happen to the Existing Bonds that are exchanged for New Bonds?

    A: The Existing Bonds that have been submitted for exchange pursuant to the exchange offer will be cancelled immediately and will not be resold.

    Q: What is the impact of conversion of the New Bonds on the major shareholders?

    A: The largest shareholder is Subash Menon and his associates, who own 12.84% of the Company. Upon full conversion of the New Bonds, their shareholding will drop to 4.05%.

    Q: If all of the Existing Bonds are exchanged for New Bonds, what proportion of the Company’s shares will they represent upon conversion on a fully diluted basis??

    A: 68%

    Q: Why has the Company launched the exchange offer prior to the scheduled release of its 30 September interim results? Why not wait until those interim results have been published?

    A: Both the price of the company’s shares and the price of the Existing Bonds were trending upwards. Any further delay to the launch of the Exchange Offer would have had an impact on the commercial terms of the New Bonds and exposed the company to potential market risk.