Taking the market by surprise at London's opening, Morgan Stanley Dean Witter launched a $90 million credit-enhanced convertible for the country's fourth largest cement manufacturer and its most profitable. Seven hours later at 3pm GMT when the deal was priced, books were said to stand eight times oversubscribed and the underlying stock up rather than down on the day, closing Rp173.7 ($3.75) against Rp169 on opening.
"Within about 10 minutes of news of this deal breaking, we had an order for $30 million," one banker enthuses. "The investor in question didn't even need to see the terms. They simply thought Indian convertible, credit-enhanced, must buy."
Priced at par with a premium redemption structure, the five-year deal came in at the tightest end of its pre-marketed range, embracing a 1% coupon, 28% conversion premium into either local stock or GDR's and three-year hard no call, thereafter unconditional. Benefitting from what would otherwise have been a double-B rating, the offering was also backed by a Letter of Credit (LoC) from AA-rated Bank of America, which gave it a yield-to-maturity of 4.6%, equating to 25 basis points through Treasuries. It had been marketed at plus 25bp to minus 25bp. The dividend yield on the stock is 2.3%.
Redemption is at 119.7% and there is also a $9.3 million greenshoe, which is almost certain to be exercised given the high level of interest generated. Other details include a bond floor of 92%, implied volatility of 24% against historic volatility in the low 40% range and fair value of about 102%, thereby leaving investors a couple of points.
Initial distribution figures show that about 75% went to Europe, a further 20% to the US and only about 5% to Asia, where Chinese New Year meant that regional demand was weaker than might have been expected. By investor type, the deal saw 60% of placement to outright convertible funds, 35%-40% to fixed income funds and the small remaining percentage to equity investors.
"This was a defensive structure, where lack of liquidity in a stock which only sees about $2 million trades a day, meant that the deal was driven by its debt characteristics," a syndicate official explains.
The company, on the other hand, was said to be primarily concerned in making sure that the transaction is converted rather than redeemed. "It eventually wants to issue equity at a premium and therefore was very focused on the coupon and conversion premium," the banker adds. "The deal incorporates a low coupon balanced by a higher yield and an extremely high conversion premium, which is even higher than it first appears because of the offering's premium redemption structure"
"As a result, the company opted to do a five-year deal, so that it would have two years in which to call it," he concludes. "Had it only launched a three-year issue, there would have been a much greater risk of not having that necessary window to force conversion."
Proceeds will be used to re-finance a combination of both domestic and international debt. In doing a convertible deal, the company's rationale was said to be threefold.
Firstly, and most importantly, it believes it has delivered a cost-effective structure that arbitrages what could be achieved in the syndicated loan and high yield markets, in the process netting 2%-2.5% in all-in savings. In doing so, the company has also diversified its funding base and sent an important reminder to its domestic lenders that it has other competitive sources of funding.
From the perspective of the wider market, the company has also been able to jump on the back of a sudden resurgence of interest in equity-linked issues from Asia and set a pricing benchmark for others that might follow. Currently, there are only two outstanding transactions from the subcontinent, both of which trade as straight debt. More may follow, particularly from the tech sector, where the combination of high growth, volatile stock prices and greater visibility among international investors on the back of a number of US listings, should encourage an enthusiastic response.
The last transaction from India was by IPCL (Indian Petrochemicals Corp.) in March 1997. Led by Goldman Sachs, the $175 million five-year deal also marked the first from Asia to be credit-enhanced and had an LoC from Bank of America. This allowed it to achieve a 2.5% coupon against a 4%-5% norm at the time.
Currently, the March 2002 deal is trading at a bid/offer price of 107/108, with parity standing at 35.10 and conversion premium out at 207.7%.
Where Gujarat Ambuja is concerned, the LoC has already been privately placed out by Bank of America. The bank was also named joint-lead manager to the convertible, with ABN Amro the only other syndicate member as a co-lead.