Giant convertible from Reliance draws ample demand

HSBC and JPMorgan arrange the $1 billion deal on a day the stock reaches a new record high. Conversion premium is kept at 30%.
Indian telecom services provider Reliance Communications last night returned to the market with its second convertible bond issue in 12 months and this time it appears to have been fully accepted by the market even though the size was twice as large as last yearÆs deal.

At $1 billion, the five-year zero-coupon CB also marked the largest equity-linked issue ever out of India surpassing Reliance's own $500 million issue in March 2006 and the similar-sized deal from HDFC in August 2005. Both those deals struggled. HDFC had to be re-offered below par, and the first Reliance deal allegedly left sole leads Deutsche Bank with a lot of paper on its own books due to a lack of investor interest. It was also sold at par.

YesterdayÆs trade was also sold at par and was said to have been multiple times covered with 50-60 investors in the book. The sale came on a day when the Indian stock market finished at yet another record high of 14,515 points, which would have helped boost sentiment.

However, the success can be at least partly attributed to the companyÆs willingness to go for a much more modest conversion premium of 30% to 35%, compared with the 50% that it commanded last year. Reliance was certainly not alone in asking for lofty premiums back then, rather it was almost the rule at the time, but since the stock market correction in May last year, investors have been unwilling to buy into such a bullish scenario.

Issuers have been slower to adjust to this new environment, however, and as a result there have been less than a handful of Indian CBs since June last year and only one other deal so far this year û a modest $60 million offering from Era Constructions (India).

The other contributing factor to the successful Reliance deal was the fact that investment banks refused to offer ridiculous terms when bidding for the deal, even though it was obviously a desirable issue to lead given the large size. It remains to be seen whether such prudence will extend to other offers in the pipeline as well or whether bankers simply realised that no investor would go near another Reliance deal if it came with overly aggressive terms.

According to market sources, six banks bid for the mandate, which in the end went to HSBC and JPMorgan.

The conversion premium was fixed at the bottom of the range at 30% over MondayÆs volume weighted average price (VWAP) of Rs508.60. However, the stock soared 5% during the day, which left the VWAP at a 1.3% discount to the closing price of Rs515.10 and resulted in the effective conversion premium falling below 30%.

The closing price marked a new all-time high for Reliance, however, which may have justified the lower premium in the eyes of the company. The stock has gained 15% in the past month alone amid hopes that the company will be successful in acquiring a 67% stake in rival Indian mobile operator Hutchison Essar which Hong Kong-based Hutchison Telecommunications International has put up for sale. Other parties interested in the stake include Hinduja Group and Vodafone Plc.

On January 27, Reliance shareholders also approved a scheme of transfer of the companyÆs existing wireless towers (CDMA and GSM) and related infrastructure to its subsidiary, Reliance Telecom Infrastructure Ltd (RTIL).

öThis is the first of a series of initiatives we will be taking to remain asset-light, and enhance our competitiveness, ultimately leading to unlocking of further value for the benefit of our nearly 2 million shareholdersö, Reliance Chairman Anil Ambani said at the time of the board's approval of the scheme.

The yield was also fixed at the end of the range most favourable to investors, or at 4.95%, after being offered at 4.45% to 4.95%. The bonds have an issuer call after three years, subject to a 130% trigger.

According to people familiar with the issue, the bookrunners provided asset swaps for 20% of the deal (half each) at 145-150 basis points which was believed to have been taken up. JPMorgan was said to be willing to provide another $50 million worth, but it was unclear whether this had been taken up as well.

The credit spread was well wide of the 90-100 basis point spread offered last time, even though spreads did generally benefit from Standard & PoorÆs upgrade of the Indian sovereign to investment grade last week.

The dividend yield was assumed at zero percent and the stock borrow cost at 5%. Together with the premium and the yield, this gave a bond floor or 92% and an implied volatility of 27.5%. The latter compared with an historic volatility of 37%-38%.

ôThe fact that there have been so few Indian convertibles (in the past eight months) likely contributed to the demand, but investors were likely also drawn to the deal because of the size which ensures it will be liquid,ö one of the sources said.
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