Essar Energy prices largest CB so far this year

The London-listed Indian company raises $500 million, bringing the total amount of CB issuance on Tuesday to $1.1 billion.

Essar Energy priced its five-year convertible bond at the investor-friendly end of guidance late on Tuesday evening Hong Kong time and, while there was quite a bit of scepticism in the market about the level of demand at that price, the bonds held above par during Asian trading yesterday.

However, the London-listed company with interests in India’s power, oil and gas sectors, wasn’t able to exercise the $100 million upsize option and the deal size was left at $500 million. The overallotment option, which can be used until January 28, was also reduced to $50 million from $75 million.

This brought the total amount of CB issuance by Asia-based companies on Tuesday to $1.1 billion – which is impressive for the third week in January. To have three deals in the market on the same night also sets a pretty interesting benchmark for the weeks ahead. According to bankers, there is talk of at least another two or three Asian deals in the works.

Notably, none of the three deals were plain vanilla either, indicating that issuers are open to suggestions of how to make their offerings more attractive to investors. Taiwanese LED chip manufacturer Epistar Corp’s $280 million deal came with asset swaps – a feature that is again becoming common on Taiwan CBs and which enables investors to hedge the credit.

BTS Group, the operator of Bangkok’s SkyTrain and bus system, didn’t provide a hedge, but paired its $327 million baht-denominated and US dollar-settled CB with a standby letter of credit from Bangkok Bank -- essentially swapping its own credit for one that is much better known and of significantly higher quality.

And the Essar Energy deal, which eventually priced at about 2am Hong Kong time that same night, came with an equity swap that provided a synthetic short position for investors interested in hedging the equity option. The equity swap was entered into between Essar Energy’s controlling shareholder and Standard Chartered Bank. According to the term sheet, the bank was prepared to offer up to $200 million of swaps, but sources said only about 75% of that was eventually used as the rest of the deal was taken up by outright investors.

The Essar Energy CB was offered with a coupon and yield between 3.75% and 4.25% and a conversion premium ranging from 30% to 35% over Tuesday’s volume-weighted average price (VWAP) of £5.3315. The share price fell 4.4% during Tuesday’s trading while the deal was in the market and the VWAP was almost identical to the closing price of £5.33. As mentioned, the coupon and yield were fixed at the wide end at 4.25%, while the conversion premium was set at 30%. Based on the exchange rate used, the latter resulted in a conversion price of $11.0861.

Sources noted that the demand was pretty price sensitive, especially since potential investors had two cheaper deals to look at on the same evening. Contrary to the Epistar and BTS transactions, the Essar Energy CB was also marketed against a live share price, which meant investors were able to adjust their price limits as the share price came down.

The Essar Energy transaction also came with the most aggressive terms of the three deals, but sources said the deal was supported by large anchor orders that helped bring the deal to a close.

The fact that the bonds held above par yesterday did support the view that the deal had been fully placed at the indicated terms. As of the end of Asian trading yesterday, they were quoted at 100.5/101.0.

In all, the deal attracted more than 50 accounts, including outright investors and some equity-type funds that were familiar with the company following its initial public offering in early May. However, with the equity swap in place, the deal also appealed to traditional CB investors and hedge funds.

Most of the demand came out of Europe, which was quite natural given that Essar Energy is listed in London. For the same reason, the deal was also run and syndicated out of London. However, market watchers noted that investors still view it as an Indian deal since all the company’s assets are based in India and that’s what they will get exposure to if they convert the CBs into equity.

Similar to other Indian CBs, the deal also didn’t feature a put, although in this case that was not due to regulatory reasons. Rather, the company wanted long-maturity debt to match the long lead time on its development projects. The CB does have an issuer call after three years and 15 days, subject to a 140% hurdle.

The company said it will use some of the net proceeds for asset acquisitions in the power, coal, oil and gas sectors. The rest will go towards debt refinancing and general corporate purposes.

The deal was marketed at a credit spread of 650bp to 700bp, full dividend protection and a stock borrow cost of about 75bp. This gave a bond floor of about 80% and an implied volatility at about 26%.

Deutsche Bank, J.P. Morgan and Standard Chartered were joint bookrunners.

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