The repeat issuer in the CB market was aiming for a conversion premium as high as 50%, but had to settle for a bottom-of-the-range 45%, which was no great surprise given that the share price is up 120% in the past 12 months. However, the premium was fixed over yesterdayÆs volume-weighted average price of Rs8.54 ($0.21), which ended up being significantly higher than the Rs8.39 close as the share price slid 3.2% after the launch of the bond issue at 2pm Hong Kong time. This means the actual conversion premium, in relation to the close, ended up at 47.6%.
According to a source, the drop in the share price was partly due to selling by existing investors who decided to also buy the CB and therefore sold some of their shares to rebalance their portfolios.
After trying to sell the bonds at par throughout the afternoon and early evening, sole bookrunner Barclays Capital finally gave up at around 9.30pm and re-offered them at 99.5% of face value. The decision, which meant the bank had to sacrifice part of its fee, was made primarily to ensure that the demand flowed into the actual deal rather than pushed the price down further in the grey market where it was already trading at 99.15 to 99.65, one source says.
Just like a year ago when Indian issuers were also ramping up the premiums, the investment banks seem to be feeling obliged to accept this in order to win mandates. Indeed, several banks were said to have been bidding for the Jaiprakash trade.
This was the second Asian CB in less than a week that had to be re-offered, which suggests investors are becoming more sensitive to high premiums and wonÆt accept overly aggressive terms. The previous one came from Pine Agritech, a Singapore-listed Chinese producer of soybean-based products, which had to cut the price on its $263 million renminbi-denominated deal to 99.625% to get away with a 51% premium û the highest ever for a renminbi-denominated CB. However, CB specialists noted that at 3.4% the yield was also the highest for this type of convertible.
After being re-offered, JaiprakashÆs zero-coupon, five-year bonds were said to have attracted about 50 investors and been about two times covered. Not surprisingly though, the bookrunner chose not to exercise the $100 million greenshoe immediately, but retained the option to do so later. This means the total deal could still be increased to $400 million if sentiment improves. Following the re-offer, the grey market price edged up to 99.5 to 99.8.
The bonds have an issuer call after two years, subject to a 125% hurdle.
The yield was fixed at the top of the 7.20% to 7.95% range, which gives an effective yield of 8.05% after adjusting for the re-offer. One observer said the yield was about right for a credit spread of 325bp over Libor, which is the level at which Barclays provided credit default swaps. However, he argued that the actual credit should be closer to 370bp.
A source close to the deal disagreed with this, however, and noted that the companyÆs two outstanding CBs that were issued in January 2005 and February 2006 were priced based on credit spreads of 300bp and 290bp respectively.
Barclays provided CDS for about half the deal and the source said about 75% of the investors took it up on the offer. The other assumptions included a 5% stock borrow cost and protection for bond holders in case the divided yield climbs above 1% or the divided exceeds 125% of the previous yearÆs distribution.
This gave a bond floor of 95.8% and an implied volatility of 28%, which compared with the 100-day and 260-day volatility that are both at around 48%.
In a release, the New Delhi-based company said it had decided to do another CB because of the ôfavourable credit and interest rate environmentö and will use the money to meet its planned capital expenditures, which include increasing its production capacity of cement and the construction of a new thermal power plant.
The company also announced yesterday that its net profit rose 52% in the first quarter (ending June 30) to Rs1.4 billion ($35 million). Total income increased by 8.8% to Rs10.05 billion.
The bond issue is still subject to approval from shareholders at the annual general meeting on August 30.
¬ Haymarket Media Limited. All rights reserved.
