Bajaj Hindusthan sweetens investors

Sugar producer completes concurrent CB and GDR.

Indian sugar producer Bajaj Hindusthan raised $255.6 million at the end of last week from a combined sale of convertible bonds and GDRs to pay for a recently announced expansion plan.

The well-received offer, which will use up 29.86 million of the company pre-approved issuance limit of 29.9 million shares if the GDR greenshoe is exercised in full, was arranged by Citigroup.

The deal comprised 16.7 million GDRs - each equal to one new common share - which were priced on Friday at $8.12 per unit, which translates into Rp358 for the company's shares listed on the National Stock Exchange of India. The units had been marketed at a 5% to 10% discount to the NSE close on Wednesday and priced at 5.01% margin. The initial $135.6 million in proceeds from the equity portion of the sale may increase to $150.2 million if the greenshoe of 1.8 million units is exercised in full.

Subscription was healthy with the order book more than 10 times covered and about 70 investors participating.

The demand was even stronger for the $120 million CB issue, which attracted more than $1.5 billion worth of orders from 144 investors. Many investors were said to have bought both GDRs and CBs.

The five-year bonds, which were issued at par, will pay no coupon but have a redemption price of 133.578%, giving a yield to maturity of 5.875%. There is no put option, but an issuer call at any time contingent upon a 130% hurdle.

The conversion premium was fixed at 30% above the reference price, which was equal to the GDR offering price of Rp358. Since this already represented a discount to the market value at the time of pricing, the effective premium would be slightly lower, however.

The bonds are convertible into common shares or GDRs at a conversion ratio of 9,471.42 shares per bond.

The pricing assumes a bond floor or 91.35%, which is the lowest floor for an Indian CB since the beginning of 2005 and shows investors were happy to pay a bit more for the equity premium. Earlier the year, Citigroup arranged a CB for Larsen and Tubro that had a 93.5% bond floor and a 35% conversion premium.

The underlying assumptions also include a credit spread of 290bp over Libor, a dividend yield of 0.3% and a stock borrow cost of 5%.

This gives and implied volatility of 31.4%, compared with a 100-day historical volatility of 50%. In its pricing models, Citigroup opted to use an historic volatility of 40%, however.

The bank provided a credit bid of $35 million, but only one of the orders is said to have been contingent upon an asset swap.

In an earnings release a couple of weeks ago, the company said its first quarter (October-December 2005) net income jumped 138% to Rp242.4 million from Rp102 million, while sales more than doubled to Rp2.87 billion, as a shortage of sugar in the domestic market is putting upward pressure on selling prices.

The management has earlier said net income may rise 90% in the year to September 2006.

At the time of the latest earnings release, the company also revealed that it will boost its sugar-crushing capacity by 5,000 tons per day to 100,000 tons by setting up a greenfield plant and build a 10MW co-generation power plant. It will also increase the generation capacity at its three mills to 270MW from 151MW. The total expansion cost is estimated at Rp4.5 billion ($102 million).

Proceeds from the bond and share sale will cover these costs, while the remainder will be used for potential acquisitions and general working capital.

Existing shareholders will see an immediate 11.5% dilution as a result of the GDR sale, including the greenshoe, and if the CBs are also converted in full the dilution will increase to 21%.

Still, for shareholders who have been around to experience the more than 10-fold increase in the company's share price since the beginning of 2004, the potential dilution is not likely to be much of an issue. As of Monday's close the share price had fallen 1.3% to Rp371.95, versus last week's pre-fund raising price.

The company did a similarly structured GDR/CB deal in May last year, selling $60 million worth of GDRs and $50 million of five-year CBs, also through Citigroup. At that time its share price was trading at around Rp144, but since then the whole sugar industry has gone through a dramatic change, including a near doubling in the global raw sugar spot to about 18.2 cents per pound from 10 cents.

A weather-related slide in production in Southeast Asia, a permanent output reduction in Europe due to a change in the agricultural policy and increasing demand for sugar canes to produce ethanol, should ensure that the upward price trend continues for at least another 12-18 months, analysts say.

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