Eros bond: Not quite a love story

Indian film producer Eros International cancelled a dollar bond this week, as nervous investors kept a close eye on US interest rates.

It has not been a good week for Eros International, a Bollywood movie producer.

The company had to jettison a planned dollar bond on Wednesday, despite offering investors a juicy pick-up over what it initially hoped for. On the same day, it was hit with accusations of fraud by a little-known short-seller, who has not yet substantiated those claims. Its New York-listed stock plummeted 12.67% in a single day, capping a fall of more than 26% since the start of the year.

Eros’ planned dollar bond was ambitious. It was set to be the first such deal from any Asian film producer. The company’s B- rating from S&P Global, as well as its ostensibly aggressive initial pricing target, also created clear hurdles to the deal going smoothly.

But most daring of all was the timing. Eros planned to come to the market just a week before a near-certain interest rate hike in the United States. The Federal Reserve will meet next Tuesday and Wednesday, and the futures market is pricing in an 88.6% chance of a 25bp hike, according to CME data.

The shadow cast by the next Fed meeting has already hurt demand for some bonds this week, according to debt bankers. Eros, it seemed, was a step too far for jittery investors.

The cancellation of the bond is bad news for a company that has been fighting a rearguard action since late last year, when Wells Fargo analyst Eric Katz released a critical report on the company. It has been further hurt this week by the Twitter posts of FG Alpha Management, a self-described "short-biased activist fund". To be clear, FG provided no evidence of wrongdoing.

Eros, which boasts Temasek among its investors, will now have to weigh its funding options, either returning to bank lenders for cash or waiting until the bond market proves more receptive. The company — which saw the bond as a way to refinance a revolving credit facility — did not immediately respond to a request for details on its plans when contacted by FinanceAsia.

There is room for hope. Although Eros initially turned to investors with price guidance of around 8.25% for its mooted five-year non-call two-year bond, the company did appear happy to increase that to 9% in a last-ditch effort to rescue the deal, showing flexibility.

There is also clear evidence that even very low rated Indian high yield issuers can get enough demand to close successful deals. Vedanta Resources, rated B1/B+ by Moody’s and S&P, raised $1 billion in January. The lesser-known Jain Irrigation Systems, perhaps a better litmus test, managed to close its own $200 million deal in the same month. Jain is rated B+ by both Fitch and S&P.

But for now, Eros will need to lick its wounds. The company was hoping for a glamorous premiere this week. Instead it was greeted by bad reviews — and a reminder that, when the Federal Reserve is getting ready to act, there is only one star worth watching.

¬ Haymarket Media Limited. All rights reserved.
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