ABN Amro Rothschild, Citigroup and Morgan Stanley were joint underwriters for the deal, which was launched only one day after the companyÆs board of directors approved the fund raising exercise.
The deal, which was priced in the early hours of Friday morning (April 7), attracted about 50 investors, some of whom put in very large orders of about $50 million each. The order book ended up close to 3.5 times covered, according to people familiar with the offering, with 48% going to Asia, 42% to Europe and 10% to the United States.
The orders were somewhat price sensitive though, and the terms were fixed at the conservative end of the indicated ranges. One banker said this showed that investors are becoming skeptical towards high premiums after several deals over the past couple of months have traded down, or even had to be re-offered at launch.
The M&M bonds were trading slightly above par at 100-100.125/100.25 on Friday, according to market participants.
The five-year, zero-coupon bonds were issued at par and will redeem at 128.03% of face value to give a yield to maturity of 5.0%. The bonds were offered to investors with a yield range between 4.5% and 5%.
They were also marketed with a conversion premium of 40% to 45% above the April 5 close of Rs658.60 ($14.83) on the National Stock Exchange. (The Indian market was closed for a holiday on Thursday). The premium was fixed at the bottom of that range at 40% to give a conversion price of Rs922.04.
There is an issuer call after two years, subject to a 120% hurdle above the conversion price. Some investors were said to have felt that this was a bit aggressive compared with the usual hurdle over the accreted value, although the company was keen to keep this feature, which matches the terms on its outstanding CB. That bond, which was issued in 2004 and trades deep in the money, hasnÆt yet reached the callable period but is now beginning to convert.
The underlying assumptions included a credit spread of 110 basis points over Libor, where the three bookrunners provided asset swaps for 50% of the deal. Given the issuerÆs strong name, investors werenÆt that concerned about credit protection, however, and the take-up was said to have been only 15-20%.
Dividend protection kicks in at a yield of 5.5%, or at a dividend payout of Rs5.5 per share, while the stock borrowing cost was assumed at 3.5% as there is some synthetic borrow available.
This gave a bond floor of 95.6% and an implied volatility of 28%, which was in line with the 100-day volatility of 29%.
Prior to the transaction, M&MÆs share price was up 28.7% this year and had rallied 170% over the past 12 months. It fell 0.9% to Rs652.80 on Friday, however, which pushed up the conversion premium slightly.
Observers said it was encouraging to see the issuer settle for slightly less aggressive terms, even though just like Reliance Communications Ventures it could easily have pushed for a higher premium or lower yield given its position as a market leader in almost all of its different business segments.
Reliance was one of the recent deals that traded down as soon as it was launched and where the bookrunner was believed to be holding part of the issue several days after the transaction.
ôThe company (M&M) is a repeat issuer in the capital markets and wanted the deal to do well,ö one observer said, adding that conversion premiums do seem to be coming down in the Indian CB market right now.
ôInvestors are getting fuller on Indian risk and also more conscious about the high levels in the stock market, which means the pricing power is starting to shift away from the issuer,ö he added.
At the same time, bankers said previous relationships with the issuer appeared to have played a big role when the mandates were awarded, which would have given the banks a bit more negotiating power.
ôThey even got to keep the fees,ö a person close to the bookrunners said.
Many investors would have been attracted to the bonds simply because M&M is considered a good equity story and has a strong position in the Indian auto market, which is AsiaÆs fourth largest. Of the analysts who follow the company, 17 have a buy on the stock while two has a hold. Only one analyst recommends clients to sell, according to Bloomberg data.
Last week, M&M said it would spend as much as Rs6 billion ($135 million) to develop new technology with the aim of becoming IndiaÆs first car maker to develop hybrid engines.
It was less specific about the use of the proceeds from the CB, however, saying only that the money would go towards product development, modernization and expansion of existing manufacturing facilities as well as overall expansion through organic growth and overseas acquisitions.
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