Indian auto parts manufacturer Motherson Sumi broke new ground for the Asian equity-linked market on Friday, with the completion of the region's first euro-denominated CB. Prior to this deal, the only other transaction with a euro component has been Temasek's multicurrency Finlayson exchangeable of 1999.
Motherson Sumi is said to have wanted euro funding because the currency provides a better match for its cash flows. Nearly two thirds of its production capacity is exported, with its biggest clients comprising car manufacturers such as Daimler Chrysler and the European-based factories of Toyota Motors. The company itself is a 19-year old joint venture in which Japan's Sumitomo Denso owns a 25% stake.
Lead managers of the $50.3 million deal are Nomura (bookrunner) and ICICI Securities, which provided the CDS protection.
Terms comprise a five-year, zero coupon, bullet deal with issue price of par and redemption price of 126.77% to yield 4.8%. The conversion premium was set at 50% to the stock's Rs74.3 close on the National Stock Exchange last Thursday. There is also a call option after three years with a 130% hurdle and no greenshoe.
Underlying assumptions are complicated by the lack of asset swap. An Indian asset swap market is only just beginning to gain traction, having been hampered by the country's strict regulations governing offshore issuance. As a result, it was difficult to structure asset swap for a euro-denominated CB and in this instance, ICICI provided CDS (Credit Default Swap) protection instead.
This made it more expensive for investors to hedge their exposure. If investors wanted full coverage at the redemption price of 126.77%, they would need 1.26 times the value of the CDS and would also incur an additional funding cost of 25bp since they would be buying the whole bond and not just an option.
This consequently pushed the credit spread out from 210bp over Libor to about 285bp over. At this level, the transaction has a bond floor of 96.06%. However, observers say most investors hedged about 50% of their exposure and used a bond floor calculation of about 97.5% in their models.
The stock has a 100-volatility of 35% and implied volatility of 19%. There is no stock borrow and a dividend yield of 2%. The company currently pays out 40% of its net income in dividends and investors are protected if it decides to pay-out above this level.
Based on all of these assumptions, the deal has a fair value of 104%.
The order book closed one-and-a-half times covered and had a fairly concentrated investor base, with placement to just over a dozen accounts. By geography, the order book had a split of 40% Europe, 30% Asia, 30% offshore US.
The transaction represents 9.1% of Motherson Sumi's enlarged share capital. The stock is currently trading at about 17 times 2005 earnings and has spiked up 15% since May when it announced better than expected results.
The CB followed a $65.1 million GDR for Apollo Hospitals led by Citigroup and Kotak Mahindra the previous day.
India's largest private sector healthcare services provider issued 8.35 million units at $7.8 each. This represented a 2.3% discount to the stock's Rs347.95 spot close. There is also a $5 million greenshoe.
The order book is said to have closed four times covered with participation by 26 accounts. By geography, the book was split 40% US, 35% Europe and 25% Asia.
Year-to-pricing, the stock was up 35% to trade on a 2005 P/E ratio of 24 times and 2006 P/E of 18 times. This compares to a regional average of 21 times 2005 and 17 times 2006 for stocks such as Singapore's Parkway.
The stock went on to trade well on Friday, closing up 1.65% at Rs353.7 per share.
