Tata Power last night priced a warmly received $450 million 60-year non-call-five hybrid at a yield of 8.5%. The initial whisper was at “high 8%” and was tightened to a guidance of 8.5% to 8.75% yesterday morning, with the bonds eventually pricing at the tight end of guidance.
The joint bookrunners — Deutsche Bank, Goldman Sachs and UBS — guided investors to a $300 million to $400 million print, but upsized the deal to $450 million after receiving a robust order book of $3.5 billion. About half the deal was taken up by private banks and the rest by institutional investors.
Tata Power is the largest private independent power producer in India and sells power to distribution companies and industrial consumers in Mumbai. The company is rated sub-investment grade at Ba3 by Moody’s and BB- by S&P, but the hybrid issue is not rated.
However, as most subordinated debt is rated two notches below the issuer, Tata could have expected a single-B rating, which would have put it firmly in high-yield territory. Notwithstanding this, the deal gathered strong support from private banks thanks to their familiarity with the Tata brand name.
The deal was also rumoured to have paid a fairly generous $0.50 private-banking rebate — perpetuals from Citic Pacific and Hutchison Whampoa were said to have paid rebates of $0.375 and $0.25, respectively.
The notes were priced at par and the coupon is fixed at 8.5% for the first five years. That yields a spread of 641.4bp over prevailing Treasuries and a spread of 622.6bp over mid-swaps.
From the fifth year to the 10th year, the coupon will reset to a fixed-rate bond that pays a spread of 641.4bp over the then-prevailing five-year US Treasury yield. And from the 10th year onwards, the bond will turn into a floater, paying a margin of 722.6bp over three-month US dollar Libor.
The bonds can be called on April 27, 2016 or any coupon payment date thereafter. There are a number of special calls, including a change-of-control and regulatory event at par.
Tata Power’s hybrid came about 62.5bp behind Citic Pacific’s perpetual, which priced at a yield of 7.875%. While both issues are unrated, Tata Power’s hybrid is expected to be rated about two or three notches below Citic Pacific’s.
The pricing for Tata Power’s hybrid, which matures in April 2071, was deemed to be tight compared to Reliance Industries’ 2040s, which were yielding about 6.7% on Monday. Reliance’s 30-year senior unsecured bond is rated Baa2 by Moody’s and BBB by S&P, about six notches above the estimated rating for Tata Power’s hybrid.
Tata Power has the option to defer coupons, but there are features in place to discourage it from doing so. This includes a dividend pusher with a six-month look-back period, meaning that Tata Power would have to pay a coupon to bondholders if it has paid dividends during the six months before its distribution date. There is also a dividend stopper so Tata Power will not be able to pay dividends if it has not paid bondholders any coupon. The deferred coupons are cumulative.
While the issue is not perpetual in nature, it will receive 50% equity treatment from the rating agencies, but it will be treated as debt from an accounting perspective. The proceeds will be used to repay an existing loan.