Autoparts maker Amtek India has raised $130 million from a fixed-price convertible bond that was upsized by 30% and triggered a rally in the share price. The deal proves that it is possible for mid-cap Indian companies to raise funds in the international CB market, but it also clearly shows that these deals are not an easy sell.
The five-year CB was offered with a 6% coupon and yield, which according to a source was the most the company could pay under Indian regulations that cap the interest on CBs at Libor plus 500bp. However, the coupon was not deemed to be enough for a mid-cap high-yield credit and to compensate investors, the conversion premium had to be set as low as 5%. The bonds also came with asset swaps to cover the entire deal, including the upsize option. The swaps were provided by Standard Chartered, although sources said the majority were sourced from other parties, partly as other forms of credit hedging that were then restructured into asset swaps. Standard Chartered was also the sole bookrunner for the CB.
Without the asset swaps the company wouldn’t have been able to do a CB at these terms, so they were definitely crucial to the transaction. However, aside from the fact that there were enough swaps to cover the entire deal, including the upsize option, the swaps were offered at a credit spread of 650bp over Libor, which CB specialists argued was well below where a mid-cap credit like Amtek India should trade. As an example they citied much larger companies with outstanding CBs, like Sesa Goa or even Vedanta, which trade at wider spreads.
However, people close to the transaction said that there was actually demand for an even tighter level from some fixed-income investors who like the company and the group as a whole. They also noted that there is a discrepancy between bilateral lending margins and the levels where Indian CBs are trading in the secondary market and Standard Chartered was able to make use of that to structure asset swaps at the 650bp level.
Either way, the terms achieved what they set out to do, namely to convince enough investors to overcome their scepticism about CBs from Indian mid-caps and buy into the deal. (Aside from concerns about corporate governance and transparency, investors are also keenly aware that a lot of the Indian CBs that were issued by mid-cap companies in 2007 and are set to mature this year are in the process of being restructured as the issuers simply don’t have the funds to pay them back after the collapse in share prices in the past few years.)
It doesn’t appear to have been love at first sight though as Standard Chartered had supposedly done quite extensive sounding with investors before bringing the Amtek India deal to market. By the time the books opened, the bank knew where the demand was and what it would take to get investors to commit, as indicated by the fact that all the terms were fixed at launch.
One source noted that the deal was almost covered when it launched at about 10pm Hong Kong time on Monday and after confirming the indicated interest and getting some incremental orders in, Standard Chartered was able to close the order books after just 90 minutes. By then the $100 million base deal was said to be approaching two times covered, which allowed the $30 million upsize option to be exercised in full.
The bonds did go to quite a small group of just over 20 investors, of which about 30% were described as outright accounts and the other 70% as hedge funds. The presence of outright investors meant that not all of the asset swaps were taken up, but one source said a substantial amount did get used.
At a 650bp credit spread, a 5% stock borrow cost and protection for dividend yields above 1%, the bond floor worked out at 90.5%, while the implied volatility was about 10.5%. As with all CBs where the equity option isn’t hedgeable, the implied vol is less important, but it does give some further indication that the deal wasn’t particularly expensive for investors.
The 5% conversion premium was set over Monday’s closing price of Rs98.1 and resulted in an initial conversion price of about Rs103. This would be below the Amtek India’s 2012 closing high of Rs109 that it reached in February, and clearly doesn’t seem particularly demanding. That said, a low premium is necessary to compensate for the difference between the coupon that investors deem fair for the credit and the actual coupon and Amtek India is not the first issuer to have to offer a single digit premium.
In December 2010, Videocon Industries, a conglomerate with businesses ranging from consumer electronics and home appliances to mobile communications and oil production, raised $200 million from a CB that was priced with a 3% premium and a 6.75% coupon — although that is hardly a benchmark to strive for.
Amtek India’s share price has gained about 130% since June last year, adjusted for a one-for-one bonus issue in November, but has pretty much stalled just below Rs100 since the beginning of the year. With the exception for a couple of days in February when it spiked up, the stock has barely moved, which seems odd — both in light of the fact that the gains in the previous six months were so pronounced and in light of the rally in the rest of the Indian market in the first two months this year.
The company does also have a thin free-float and trading volumes are extremely light at just about $1 million per day, which suggests that the share price should be rather volatile. One source noted that the company’s intention to raise funds was well-known — Standard Chartered was mandated for the CB late last year and a number of other banks were competing for the deal at the time — and many investors may have chosen to stay away from the stock until it was clear whether the fund-raising exercise would be successful or not.
Whatever the reason for the stalled share price year-to-date, it seems to have been wiped out now though. Yesterday, the stock finished 8.8% higher at Rs106.75 after gaining as much as 14.2% earlier in the session. Turnover was also significantly higher than normal at about $3.1 million. The CB was quoted at 101 to 103 before the opening of the Indian market, but not many bonds were changing hands.
One key question is why the company chose to pay a 6% coupon for just a 5% premium. However, the discount restrictions on Indian follow-on share issues may have made it quite difficult for the company to offer new shares at a price that investors would accept and the CB may be a way to get around that. Clearly, the company does want the CBs to convert into equity though, and given the jump in the share price yesterday, that does seem quite likely. The CB does have a mandatory conversion option after three years, subject to a 130% trigger.
Amtek India makes a variety of parts for cars, motorcycles, tractors, commercial vehicles and stationary engines, with a specific focus on iron cast components. It sells its products to both domestic and international vehicle manufacturers, including Ford, GM, Honda, Toyota, Mercedes-Benz and BMW. In the six months to December 31, its Ebitda almost double to Rs2.17 billion ($42 million) from Rs1.16 billion in the same period the previous year. The company is 62%-owned by Amtek Auto, which also makes auto components, but primarily for use in the engine, transmission and suspension systems. There is no overlap between the two companies.
In a statement to the Bombay Stock Exchange yesterday, Amtek India said it will use the CB proceeds for future acquisitions and for capital expenditures.