Observers say the terms were aggressive, which was also indicated by the fact that the yield was fixed at the wide end of the indicated ranges. However, the conversion premiums, which were fixed at launch, were not as eye-catching as on some recent deals which have had premiums well above 50%. The lower conversion for Moser Baer would have made it easier for investors to accept the tough terms, including a 300bp credit spread.
The conversion premiums were set at 25% for tranche A and 40% for tranche B, both over yesterdayÆs closing price of Rs436.75. Each tranche amounted to $75 million and both of them have a five-year maturity and will pay no coupon. There is an issuer call after three years subject to a 130% hurdle, but no conversion price resets which have become quite a common feature over the past month as a way of making investors accept very high premiums.
The yield on tranche A was fixed at the top of the 5.60% to 6.10% range, while the yield on tranche B was set at the top of a 6.25% to 6.75% range. That yield is quite an achievement, being at the low end of what similar mid-cap Indian companies typically have to pay to attract investor interest. By comparison, wind turbine producer Suzlon Energy priced its $300 million CB three weeks ago with a 7.6% yield to maturity.
But Moser still attracted sufficient interest from investors who are exited about the companyÆs move into two new growth areas. One is the involvement with photovoltaics and the manufacturing of solar cells; the other is a move into the entertainment business through the sale of Indian films for home viewing, using its self-produced DVDs.
Local investors are highly excited about the latter, which will see Moser, having acquired a library of 7,000 film titles, leverage the low manufacturing costs of its DVD production business. The aim is that the low price will attract customers who have previously been buying pirated movies. The international investment community, on the other hand, sees more growth potential in the solar space.
As in indication of that potential, Photon Consulting projects that solar power production will grow at a compound annual growth rate of 43.7% from 2005 to 2010. It also believes that solar power industry revenues will reach $72 billion by 2010 from $12 billion in 2005.
Both the solar power and the entertainment business are considered additional options on top of MoserÆs well-established storage media business, however.
The company has spent quite a bit of time on investor education over the past few months to make sure investors understand the expansion into these new areas. The effort appears to have worked as the share price has almost tripled from a low of Rs162 in June 2006 to a high of Rs471.9 on May 21 this year.
In light of that it isnÆt surprising that the low-premium tranche A attracted a bit more interest and ended up being just over two times covered, while tranche B was about 1.5 times subscribed. The deal attracted about 40 investors, including some offshore US accounts.
Joint bookrunners Citi and Morgan Stanley were said to have offered asset swaps for one-third of the deal at 300bp over Libor. The underlying assumptions also included a 3% borrow cost and a dividend yield of 1%. For tranche A, this gave a bond floor of about 90% and an implied volatility of 26% and for tranche B a bond floor of 93.25% and an implied vol of 27%. The historic vol is in the 40s, although with this not being a particularly liquid and hedgeable stock, most investors were buying the CB on an outright basis.
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