The fact that the bond comes from an Indian company is an encouraging sign for market participants as it suggests the long period with virtually no equity-linked issuance from this country following the correction in the secondary market in May last year has now ended. This was the second CB by an Indian issuer in four weeks after Financial Technologies raised $100 million in mid-December with the help of Deutsche Bank. Prior to that there had been only one deal of size (in July last year) after the correction.
The lack of issuance has been attributed partly to the widening of Indian credit spreads as a result of the correction, leading to a mismatch between the conversion premiums that issuers are seeking and those that investors are willing to accept.
Era Construction tackled the latter issue by using forward pricing whereby the conversion price will be based on a reference price set one year into the future. Thanks to this, the company will be able to incorporate any potential share price upside over the next 12 months into the final conversion price, while keeping the conversion premium at 20%.
ôThis is still a small company that is not that well covered by international research analysts, which means the valuation hasnÆt come through. However, the management sees significant upside this year as it is expanding the business and broadening its international investor base,ö a source familiar with the deal says with regard to why the company chose the forward pricing structure.
The structure isnÆt entirely uncommon among Indian companies with at least four other such issues over the past 18 months, according to bankers. However, most of those have had premiums in the 40%-50% range, which have led to high bond floors of 97%-99%. Because of the 20% premium, Era was able to achieve a bond floor of 95%, making it a good deal for the company.
There is an issuer call after two years, subject to a hurdle of 130%.
The fact that the equity option doesnÆt kick in until after a year means that the CB is essentially a pure credit play for the first 12 months. Consequently, not all the usual Asian CB investors were interested and the order book was said to have been less than two times covered when it closed early Wednesday.
Still, the deal attracted about 40 investors. These were predominantly Asian CB players, although there was also ôdecentö participation from both European and offshore US accounts, the source says.
The bonds were priced to yield 8.125%, which was at the top end of an offered range that started at 7.625%. Similarly, the conversion premium was fixed at the generous end of a 20%-25% indicated range. The premium comes on top of a reference price that will equal the volume-weighted average price for the share on the Bombay Stock Exchange in the 45 trading days to January 24, 2008, subject to a floor of Rs419.19.
EraÆs share price is up 185% since the beginning of 2006, but has only just started to re-approach last yearÆs high of Rs524.05 which it hit in early May. A sharp correction over the following 2.5 months took the price as low as Rs170.35 - a 2.4% decline from where it began the year.
In the wake of the CB issue the stock fell 2.55% yesterday to a close of Rs497.50. However, the CB traded up to about 101.25, according to a market participant.
The underlying assumptions for the bond included a credit spread of 450 basis points, a dividend yield of 2% and a stock borrow cost of 5%.
A diversified construction company, Era is involved both in large-scale projects such as airports, power projects and infrastructure developments as well as in the development of industrial complexes and residential buildings. According to the term sheet, the proceeds from the CB will be used primarily for capital expenditures and investments in BOOT/BOT projects.
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