Amtek Auto brings "low" premium Indian convertible

Investors award modest conversion premium with hefty demand that drives yield to the tight end of the indicated range.
IndiaÆs Amtek Auto has raised $250 million from a convertible bond sale that drew strong demand from investors who welcomed the auto parts manufacturerÆs decision to come to market with a fairly moderate premium.

After a slew of 40-50% premium deals out of India, AmtekÆs fixed premium of 30% stood out as extremely reasonable - and in combination with the companyÆs strong track record and solid earnings outlook this appeared to have turned the CB into an offer that ôeveryoneö felt they needed to buy, says one observer.

When sole bookrunner Citigroup closed the books in the early hours of Thursday morning (May 11) 135 investors had placed orders leaving the offer about 10 times covered, according to a source familiar with the deal. A majority of the specialist convertible investors in Asia and Europe who tend to look at most deals from this region took part, which meant about 60% of the demand came from Asia, 30% from Europe and the remaining 10% from offshore US accounts, the source says.

Several investors who bought in had also held and made money from the companyÆs outstanding convertible which was launched in the middle of last year via Barclays. That issue is already deep in the money and has been largely converted.

Thanks to the strong demand, Citigroup was able both to price the deal at the tight end of the 6% to 6.5% yield range and to increase the issue from the original size of $225 million.

The five year bonds will pay no coupon, but are redeemable at 134.41% for a 6% yield. The conversion price of Rs458.64 was set over WednesdayÆs close of Rs352.8 on the National Stock Exchange.

There is an issuer call after three years, subject to a 130% hurdle and the company also has the option to reset the conversion price at a lower level at any time. While such a reset option has no value to investors - since there is no guarantee it will be used - it does show that the companyÆs intention is for the bonds to convert.

The bookrunner offered a credit bid for just under half the issue at 250 basis points above Libor, which gave a bond floor of 91% and an implied volatility of 33% against a 100-day volatility of 43%.

As for so many other Indian companies, the historic volatility is one-directional with the share price having risen 106% in the past year. It fell 4.4% yesterday after the bond issue, however, for a close of Rs337.1 - 9.6% below the all time high of Rs373 reached earlier in the week.

Other assumptions included a stock borrow cost of 5% and a dividend protection which kicks in at a 1% dividend yield or a 20% increase in the dividend from the previous year, whichever is greater.

Some investors were believed to have been attracted to the deal by the indicated 6.5% yield, while several European accounts were said to have come in with inflated orders after a grey market price of about 101 was being quoted for the bonds during bookbuilding.

Because demand drove the pricing to the tight end, however, the company was able to achieve a better value in terms of the yield/premium trade off, which suggests the managementÆs decision to go for a lower premium was ôpretty savvy,ö the observer says.

The bonds continued to trade up in the aftermarket and by early evening yesterday they were bid at 101 + to 101 5/8.

Aside from the technicals of the deal, investors also liked the companyÆs equity story and its strong list of Tier 1 clients which includes most of IndiaÆs major auto manufacturers as well as global giants like Ford Motor, Renault and Toyota Motor Corp.

In the nine months to March 2006, the company reported a 77% increase in net profit to Rs2.06 billion ($45.8 million). To support its growth going forward, the company is looking for acquisitions primarily in Europe.
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