Larsen & Toubro returned to the convertible bond market on Monday night with a $125 million convertible via ABN AMRO and Citigroup. The deal had been expected for a while, with launch awaiting the announcement of third quarter results and the stock going ex-dividend following the payment of an extraordinary dividend.
Indian CB's remain a difficult sell to international investors as a result of the terrible performance of deals launched earlier this year. As a result, L&T's offering had a very concentrated investor base (just 35 accounts) and was only just subscribed (1.5 times).
In the deal's favour, it was quite small and backed by a very strong credit rating. L&T has a triple A domestic rating, which places it alongside Reliance Energy as the highest rated outstanding Indian CB.
Terms were also reasonable and the deal has a high yield relative to its peers. The transaction has a five-year non puttable structure with a coupon of 1.25% and yield of 4% to redeem at 114.9%. There is also a call option after three years subject to a 130% hurdle.
The conversion premium was marketed on a 35% to 40% range and priced at 35% over the stock's Rs832.50 close on Monday. The stock is currently up 85% over its year-to-date low of Rs450 in May and is trading at 30 times 2005 earnings (excluding extraordinary income).
Underlying assumptions for the CB comprise a bond floor of 92.5%, implied volatility of 31% and theoretical value of 101%. This is based on a credit spread assumption of 175bp over Libor, 5% borrow cost, 2% dividend yield and 32% volatility assumption.
The stock is now trading on a dividend yield of 1.8%. It recently paid out Rs10 per share following a de-merger of its engineering and cement businesses earlier this year. The latter was subsequently sold to Grasim Industries netting L&T Rs3.5 billion.
The deal was helped by the fact that Indian CB's have recovered slightly over the past month or so and Tata Motors 1 is currently the only outstanding issue bid below 90% - at 85%. Its peers are all now trading at the mid 90% level, while pharmaceuticals company Wockhardt has been bid up to 104%.
This latter deal provides the most recent pricing point and was priced in mid-September with a much higher conversion premium than L&T (50%), but a more defensive bond floor (94.1%). What both deals share in common are fairly high yields. Wockhardt is currently bid at 4.36%, while L&T's nearest credit comparable, Reliance Energy is at a much tighter 3.7%.
Specialists say L&T's deal was underpinned by the credit bid with about $30 million immediately asset-swapped. About 60% of the investors who participated were hedge funds and the remaining 40% long only accounts. By geography, about 40% went to Europe, 40% to Asia and 20% to offshore US accounts.
