HDFC, the leading housing lender in India, broke new ground yesterday with a two times subscribed convertible bond. The $500 million issue was significant in two key respects. First, it was the largest convertible bond ever from India - beating a Tata Motors issue from April 2004 - and was likewise the largest Asian convertible bond to date in 2005 - beating a $475 million issue by LG Philips. Second, it was the first convertible bond from India's financial sector following regulatory changes by the Reserve Bank of India this month.
Thanks to these regulatory changes market participants now forecast that three to four other financial institutions will follow HDFC's lead with convertible bonds in the range of $200-300 million.
HDFC's Chairman, Deepak Parekh noted of the bond's significance: "The issuance of these bonds is a landmark event for HDFC and opens up another avenue for Indian financial institutions, including HDFC to raise capital in the international markets. These bonds will contribute to the capital requirements of HDFC and enable it to consolidate its position as the leader in the housing finance market. The offering is part of our continued efforts to diversify our investor base and we are delighted with the response to the offering."
The five year zero coupon bond - which was lead managed by ABN AMRO, Barclays Capital, Citigroup and JPMorgan - has a yield to maturity of 4.62% and a conversion premium of 55.6% (or 50% based on a 10 day weighted average). The conversion premium is substantial. Indeed, with the stock currently trading at Rs885, the premium comes into the money only at Rs1399.
However, the high conversion premium follows a clear trend that has seen Indian companies setting ever higher premiums - to capitalize on the rapidly rising stock market. For example, in a CB done earlier this year Strides Arcolabs priced a CB with a 70% conversion premium and a 6.8% yield to maturity. Tata Power's issue also had a 50% conversion premium.
In this case, investors were not put off by the steep premium - warming to the 4.2% yield-to-maturity and the fact that the issue gave them exposure to an Indian financial institution for the first time in the CB arena. The fact that HDFC, with $10 billion of assets and a $5 billion market capitalizatio, has been a model of corporate governance, and a dominant player in India's fast growing housing market, only added to the appeal.
ABN AMRO, for example, has a buy on the stock with a 12 month price target of Rs975. The stock, which is one of India's most blue chip, has an implied volatility of 22.8%.
Thus far in 2005 there have been 19 convertible bonds out of India, but only four were larger than $100 million in size. This deal, at a record $500 million, represents 26% of total Indian issuance year to date, and 8.7% of Asia ex-Japan convertible issuance.
The deal also signals something of a turning point for the Asian convertible bond market. The opening months of 2005 were unquestionably tough - first half new issuance was down massively at $4.1 billion versus $9.7 billion in the first half of 2004. However, the recent ABN AMRO led CB for Compal saw a definite change in sentiment with $1 billion of demand arising for a deal that was initially sized at $220 million.
The oversubscription on the HDFC deal only confirms that trend. The reason? Bankers say that investors benefited from better market performance in July and saw positions move back into the black. They were thus ready to participate in new issues once again.
Meanwhile, HDFC had been looking at this structure for quite a while and thus when the Indian central bank did change the regulations early this month it was able to move quickly to execute the deal.