Back in May I wrote about Subex’s poor financial results, and in that story I highlighted a serious problem that had emerged on the horizon of this Indian revenue assurance vendor: refinancing the US$180M raised through foreign currency convertible bonds (FCCBs). What are FCCBs? They are a bond, issued in a different currency to the issuer’s home currency, which can be converted into equity. The significant fall in the price of Subex shares means that bond holders would redeem the bonds when they mature, and not convert them into equity. Unless Subex’s share price bounces back, Subex will be forced to raise new finance when the bonds mature. Either Subex will have to dilute the equity investment of current shareholders (difficult unless the Indian stock market starts to rally), or will have to raise new debt. The interest on any new debt raised by Subex is likely to be higher than the coupon on the FCCBs, partly because the Indian stock market is in the doldrums, partly because Subex already has a stretched balance sheet. We also have to assume that the credit markets are functioning more normally by then. Even if Subex has very strong revenues and earnings in the coming years, the total net debt of Subex, including FCCBs, would likely be over 5 times annual revenues and over 10 times annual earnings. Covering increased interest payments would then stretch Subex even further.
Why am I reminding you of this now? Because I am not alone in noticing Subex’s worries. I am just a humble RA guy, but Krishna Mony is an Indian investment banker, and Krishna’s blog has recently analysed Subex’s problem with FCCBs. He is not optimistic about the future of Subex. The tide of investor sentiment may be turning against Subex. Keep an eye out for Subex’s half-yearly results, which should be reported before the end of November. Those results need to indicate a strong operational turnaround if confidence is to be maintained.