Glenmark prints $170m CB with rare structure

Indian pharmaceutical company issued the convertible bond with a structure that allows the issuer to set the conversion price at a future date.

Indian drug research and manufacturing firm Glenmark Pharmaceuticals raised $170 million on Tuesday from a US dollar-denominated convertible bond with an unusual structure that has not been seen in Asia for over a decade.

Glenmark’s convertible bond was launched with a six-year tenor and an investor put exercisable after five years and a month. The deal was marketed at a base size of $150 million with a $50 million upsize option, which was partially exercised immediately before the close of the transaction.

The final offer size was settled at $170 million, although the company can still exercise the remaining $30 million of the upsize option within 60 days, according to the deal terms.

Unlike typical Asian convertible bonds, which set the conversion price at the time of the issuance, Glenmark’s new deal adopts a forward-pricing mechanism that enables the issuer to fix the conversion price 18 months after issuance.

Bonds issued with this structure are officially known as resettable onward starting equity-linked securities, or ROSES.

Such a structure is typically seen in high growth companies and allows them to preserve some equity upside at the time of the issuance.

In the case of Glenmark, the company believes its shares could outperform the market in the near future because of new product launches. As such, it has adopted the ROSES structure to retain the equity upside within 18 months by pricing the deal only on November 30, 2017.

According to a company research report, Glenmark is expected to launch five new drugs with combined estimated sales of $13.7 billion.

Deal terms

According to the deal terms, the final conversion price will be determined with reference to the volume weighted average price (VWAP) of Glenmark's shares between November 7 and November 30, 2017. Pricing will be settled at a premium of 20% over the VWAP or a floor price of Rs861.84, whichever is higher.

The new deal's floor price — the minimum price allowed by Indian regulations — represented a 1.2% premium to Glenmark's Tuesday close at Rs851.15. On Wednesday the stock fell by 0.14% to close at Rs850.

Glenmark's new bond was issued with a 2% coupon and pays a back-end yield of 5.75% based on the 121.78% put and 126.42% redemption levels.

Under the ROSES structure Glenmark’s new deal is technically a vanilla bond for the first 18 months when bondholders could receive a total coupon of 3%. After that they will get the equity option, which lasts for three years and seven months until put and four and a half years until maturity. 

The new issue’s bond floor is close to 100% based on a credit assumption of 400 basis points, so the bond actually offers sufficient downside protection, according to a source familiar with the situation. 

In the worst-case scenario of a significant underperformance in Glenmark shares, bondholders could still retain a 5.75% return per year until July 2021, which is fairly attractive in the context of Indian credit in the pharmaceutical sector.

International Finance Corporation, a member of the World Bank Group, is an anchor investor in the transaction, according to the source, who declined to comment on the specific amount of the investment.

Glenmark Pharma researches and sells drugs with therapeutic focuses on inflammation, oncology, and pain.

JP Morgan is the sole bookrunner of the transaction.

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