Ballarpur International Graphic Paper Holdings braved market conditions to price a $200 million perpetual last night.
Ballarpur is a debut borrower and its perpetual is unrated. However, as the company is rated BB- by S&P and Fitch, and most perpetuals are rated two to three notches below the issuer, the hybrid was indisputably a high-yield deal.
The guidance was released in the 9.75% area and did not move from there. The final guidance was 9.75% and that's where the coupon was fixed for a par issue price.
The leads — HSBC and Royal Bank of Scotland — heavily targeted private banking clients and most of the bonds were distributed to Asian investors. Despite the Reg-S/144a documentation — which allowed the deal to be offered to professional US investors — the roadshows bypassed the US and focused instead on Singapore, Hong Kong, London, Zurich and Geneva. The deal paid a 50 cent private banking rebate.
The bonds had a rocky start in secondary trade this morning. Amid very weak Asian equity markets, with the Hong Kong Stock Exchange and the Nikkei both plunging 5%, the bonds traded lower, with a quote from one rival bank putting it at 95.75/96.75, over four points below the par issue price on the bid.
The deal was said to have gathered an orderbook of $350 million from 60 accounts. Asian investors were allocated 77%, European 21%, and others 2%. Private banks were allocated 77%, fund managers 19% and banks 4%.
Ballarpur’s deal is the first subordinated dollar perpetual from India. Tata Power had also priced a $450 million hybrid in April, but that was a 60-year non-call-five issue. Ballarpur’s perpetual offered a 275bp pick-up over Tata Power’s hybrid, which traded at a yield of 7%.
Ballarpur was also the first high-yield dollar bond to price since Vedanta’s $1.65 billion bond closed at the end of May. The difference in the size of the two deals is a reflection of just how much markets have changed in two months.
“It’s deathly quiet out there,” said a banker not involved on the deal. “I think most of the US investors are still worried about corporate governance issues, particularly for Chinese borrowers. But what Ballarpur has going for it is that it is not competing with any other issues.”
The issuer is a subsidiary of Bombay Stock Exchange-listed Ballarpur Industries, India’s biggest maker of writing and printing paper, and the flagship company of India’s Avantha group. The business is highly leveraged, with a debt to total capital ratio of about 50% and capital expenditure estimated to be more than $700 million during the next three to four years, according to Standard & Poor’s.
Ballarpur’s perpetual was structured similarly to Citic Pacific’s perpetual, with a few differences — in this latest deal, the issuer is unlisted and the dividend pusher applies to the parent, Ballarpur Industries.
Furthermore, the dividend pusher only applies to deferred coupons, not current coupons. In other words, if Ballarpur Industries has paid dividends to shareholders, it has to pay all deferred coupons but is not obliged to pay a current coupon. As a result, investors are less well protected. Any deferred interest is cash cumulative and compounding.
Other features were fairly standard. The coupon for Ballarpur’s perp resets every five years. A spread of 857bp will be added to the then prevailing five-year US Treasury yield to calculate the new coupon payable. From the 10th year onwards, there is a 100bp step-up which means that a spread of 957bp will be added to the prevailing five-year US Treasury yield. There is a 5% step-up if no redemption is made by the issuer within 60 days of a change of control. The bonds are callable at the fifth and 10th year, and at every distribution date thereafter.
Given the company’s aggressive capital expenditure plans, particularly in its financial year 2014, during which the company has budgeted $498 million, Nomura analyst Pradeep Mohinani suggested that investors look at the deal as a 10-year bond rather than a five-year bond.
“We would note that the company has a history of running its business on an aggressive leverage profile, maintaining it right below its loan covenants, while initial projections suggest that cashflows for FY2012 will continue to remain tight with limited deleveraging over the next two years,” he also said in his research note.
Away from Ballarpur, Indian Railway Finance Corp has mandated Bank of America Merrill Lynch, Barclays Capital, Citigroup, Deutsche Bank and J.P. Morgan for a dollar bond. The company kicks off investor meetings in London, Singapore and Hong Kong today. The company is rated Baa3 by Moody’s and BBB- by S&P and Fitch.
Elsewhere, the Republic of the Philippines has shortlisted Citi, J.P. Morgan, Goldman Sachs, HSBC, Standard Chartered and UBS for its peso global note and the six banks will likely all be mandated on the deal as well. The Philippine central bank has reportedly approved an issuance of $1 billion to $1.5 billion equivalent.