Indian Hotels prices CB

Luxury hotel group completes debut convertible.

The Asian CB market gained welcome diversity yesterday (Tuesday) with the pricing of a $135 million convertible for Indian Hotels via Citigroup, Merrill Lynch and Morgan Stanley. Citi and Merrill were also lead managers of a $100 million deal for sister company Tata Engineering & Locomotive (Telco), the last convertible to hail from India in July 2003.

The huge liquidity currently propelling the regional equity-linked market was once again evident, with terms revised at launch and books closing 20 times covered after a two-hour bookbuild. Indian regulations meant the deal had to have a long five-year maturity and was priced at par, with a 1% coupon and redemption at 111.545%.

The yield-to-maturity was initially marketed on a range of 3.4% to 4.15%, but was priced inside these levels at 3.15%. The conversion premium was marketed on a 14% to 19% range and priced at the tight end to the stock's Rs421.45 close. There is also a two-year call option with a 125% hurdle and a $15 million greenshoe.

Underlying assumptions comprise a bond floor of 86.9%, implied volatility of 31.5% and theoretical value of 103.25%. This is based on a credit spread of 250bp over Libor, 5% borrow cost, 1.5% dividend yield and 100 day volatility of 38%.

The deal represents the largest non credit enhanced deal from India in a decade and has managed to push bond floors from the country to a new low. Specialists believe the success of the deal may prompt a spate of similar transactions from the Sub Continent, with borrowers seeking to take advantage of a market window and regulatory forbearance towards overseas issuance while they can.

A total of 200 accounts placed orders, with about 75% of the total allocated. There was said to be virtually no asset swap demand, with the book splitting 60% outright accounts and 40% long-only accounts, with a smattering of fixed income investors. By geography, the deal split roughly 45% Asia, 25% offshore US and 30% Europe.

Accounts are said to have a favourable view of the Indian market, Asia's second highest performer during 2003. So far this year, the market has been down and Indian Hotels has fallen 6% of which 4.2% of the drop occurred yesterday.

Against this backdrop the conversion premium is fairly low, but the trade-off has been the aggressive yield and large issue size. By contrast Telco's $90 million deal from last summer was priced at par with a 1% coupon, 17.5% conversion premium and redemption at 116.824% to yield 4.1%.

At launch, the deal had a bond floor of 92.3%, implied volatility of 27% and theoretical value of 106%. This was based on a 275bp credit spread, 3% dividend yield, 4% borrow cost and 30% volatility assumption.

Yesterday the deal was trading on a bid/offer spread of 140%/144%.

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