It also helped that the company, which is the flagship of the Kalyani Group and IndiaÆs leading manufacturer and exporter of steel forgings and components for the auto industry, is considered a solid Indian credit and one that has been to the market before with a similarly structured CB.
ôItÆs definitely a punchy premium, but Bharat Forge is a good name which investors are familiar with and many of them have also made money on already since its outstanding bonds are trading in the money,ö one observer says.
The new bonds too did well with both tranches trading slightly above par yesterday, while the companyÆs share price traded higher for most of the session before finishing 0.74% lower at Rs428.2.
Still, it would have taken some cool nerves to come to market with that high a conversion premium at a time when investors are starting to question how much higher the Indian stock market can go and therefore are becoming increasingly wary about very high premiums.
Against that backdrop it is unlikely that the company would have been able to do the full $80 million at a 60% premium, and thus the split into two tranches, commented bankers not on the deal. Both tranches were also priced at the wide end of the marketed yield ranges, which has been the case on most recent CBs out of India, they noted.
The deal was split equally into two parts: a $40 million Tranche A with a six-year maturity, a 40% conversion premium and a 6% yield to maturity; and a $40 million Tranche B with a seven-year maturity, a 60% premium and a 6.5% yield.
Tranche A had been offered at a yield of 5.5-6%, while the longer tranche was offered at 6-6.5%. Both tranches have a zero coupon, were issued at par and carry an option for the issuer to force mandatory conversion of the bonds after three years, subject to a 130% trigger.
Based on TuesdayÆs closing price of Rs431.45 on the National Stock Exchange, Tranche A will have a conversion price of Rs604.03, while Tranche B is convertible at Rs690.32 per share. Investors can convert into either common shares or Global Depositary Shares.
There is dividend protection above 2.2% or above an absolute payout amount that starts at Rs3.306 per share and is stepped up at each anniversary. The stock borrow cost was assumed at 5% given the lack of available stock lending.
Citigroup provided asset swaps for half of each tranche at 160 basis points over Libor (Tranche A) and 180 basis points over Libor (Tranche B), which gave a bond floor of 95% and 96.5% respectively. The implied volatility was 30% for the six-year bonds and 31.5% for the seven-year, which compares with a 100-day historic volatility of 29.5%
The share price has risen 76% in pretty much a straight line over the past 12 months, however.
ôI would say most investors looked at this as a blended deal with a 50% premium and a bond floor above 95%, which seems fair or on the cheap side even,ö one banker who was not on the transaction said.
Investors seem to have agreed, since Tranche A was 3.5 times subscribed, while Tranche B was 2.5 times covered. A total of 29 investors participated in Tranche A, and 21 of them also bought into Tranche B. No investors bought only the longer tranche. About 70% of the deal went to Asia, 20% to Europe and 10% to offshore US accounts.
ôClearly investors were more interested in Tranche A, but they accepted the fact that the deal came as a package,ö said one observer. Also, with a longer maturity û Indian CBs are typically five-year deals û investors have a longer window during which to reach the conversion price and thanks to the good credit they can be sure that the bond floors do mark the ôrealö downside, he added.
As usual for Indian CBs though, investors were primarily interested in the equity story, which for Bharat Forge has been lined with acquisitions over the past few years. Indeed, according to the term sheet the proceeds from the CB will be used partly to make international acquisitions and investments, partly to expand the companyÆs manufacturing operations in India and overseas. However, other purposes permitted under the relevant guidelines were also possible, the company said.
In a report issued earlier this month, B&K Research said it remains confident about the growth of the company both with regard to the domestic and overseas markets.
ôWith the company setting up a base in China (through a 52%-owned joint venture), we expect this venture to emerge as a big contributor to the companyÆs revenue over the next two- to three years,ö the report said.
It continued: ôFocus on non-automotive business will help the company in getting incremental growth (and) with strong visibility for the utilization of existing capacity and a healthy balance sheet with impressive cashflow generation, we feel that Bharat Forge is moving towards the self-sustaining growth phase,ö
The companyÆs net profit increased by 29% to Rs1.62 billion in the fiscal year ending March 2005 and in the nine months ending December 2005 it had already reached Rs1.54 billion, or 95% of the previous full-year.
According to market participants Tranche A was bid at 100.125-100.625 yesterday and Tranche B was bid at 100-100.5, although trading was reportedly thin.
The companyÆs outstanding CB, which was issued just about one year ago and has a five-year maturity, also has two tranches of $60 million each which had initial conversion premiums of 40% and 60% respectively. That issue was jointly arranged by JPMorgan and Citigroup.
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