Indian steel maker raises $325 million from CB

The bought deal is re-offered below par at launch to accommodate the aggressive terms, including a 50% conversion premium.
Indian steel maker JSW Steel yesterday completed the international fund raising that it flagged at the end of April by selling $325 million worth of five-year convertible bonds.

The bought deal, which is the companyÆs first foray into the international capital markets since its IPO, was offered at fairly aggressive terms and, to ensure there was sufficient interest, joint bookrunners ABN AMRO Rothschild and Citi chose to launch it with a re-offer price of 99% to 100%. The zero coupon deal was eventually priced at 99%.

The conversion premium and the yield were also fixed at the top end of the indicated ranges to the benefit of investors. However, the company is said to be happy as it still achieved a 50% conversion premium over a record high closing price. The share price has risen 65% so far this year and has more than doubled in the past 12 months.

And according to sources, the bookrunners made at least a little bit of money on the transaction even with the re-offer, meaning they too were okay with the outcome. Both banks were mandated early, but after JSW announced the plan to issue a foreign currency CB two other banks approached the company with proposals incorporating very aggressive terms and managed to get themselves leading roles on the deal alongside the initial bookrunners. When the deal launched yesterday those two banks were again off the term sheet, however, and one source says they had been dropped after failing to live up to their aggressive bids.

The company still wanted to attempt an aggressive pricing structure, however, so ABN and Citi, who were keen to do the deal for relationship reasons, decided to sacrifice part of their fees and go head at a slightly lower issue price.

The deal attracted more than 50 investors who collectively subscribed for about 1.5 times the amount of bonds on offer. The book, which was open for about 2.5 hours in the late Hong Kong evening, contained the usual blue-chip CB investors, including six or seven names who - deeming from their large orders - clearly liked the transaction, the sources say.

The bonds were marketed with a conversion premium between 50% and 55% and a yield to maturity of 6.75% to 7.25%. As noted earlier the premium was fixed at 50% over yesterdayÆs close on the National Stock Exchange of India of Rs636.30 for a conversion price of Rs953.40.

The yield to maturity was fixed at 7.25%, or at an effective 7.45% after taking account of the re-offer price. There is an issuer call option after three years to help force conversion if the share price continues to perform, subject to a 130% hurdle. If fully converted, the company will have to issue new shares corresponding to 8.75% of the existing share capital.

The bookrunners were said to have offered asset swaps for one-third of the deal at 350bp over Libor and the other underlying assumptions included a 5% stock borrow cost and a dividend yield protection that will kick in if the payout ratio exceeds 20% in any given year. The latter equals a dividend yield threshold of about 2%-2.5%.

At the re-offer price this gave a bond floor of 94.3%, which is pretty aggressive for a 50% premium, and an implied volatility of 32%.

Investors who bought into the offering likely felt that the positive equity story outweighed the somewhat pricy terms on the CB. They also ignored the fact that the CEO and joint managing director of JWS, B N Singh, has announced his early retirement from the company as of June 1. Singh will stay on as an adviser to the company, however, and when the news of his retirement became known a couple of weeks ago it had only a marginally negative impact on the share price.

The basis for the optimism is a the ongoing construction boom in India and China which is fuelling an increase of demand for steel, while at the same time steel prices are recovering due to a reduction of output in China.

JSW, which specialises in the manufacturing of hot-rolled steel strips, sheets and plates, will quadruple its production capacity to 10 million tonnes by 2010 from 2.5 million tonnes today to meet that that surge in demand. It recently acquired three coal mines in Africa to secure enough supplies for this planned capacity increase.

To help pay for this expansion, JWS also secured a $125 million syndicated loan earlier this month.

According to a sector outlook published by the company at the end of April, the global consumption of finished steel is expected to grow by 5.8% in 2007 to reach 1.18 billion tonnes, while net steel exports from China will fall to about 10 million tonnes from 25 million tonnes in 2006.

This was the third convertible out of Asia that had to be either re-offered or re-priced over the past month as a wave of new issuance has left CB investors in a position where they can be choosy about what deals to buy and at what price. It was the first deal to be launched with a re-offer price at the outset, however, which one source argues was a smart move under the circumstances as it enabled potential investors to incorporate the lower price into their valuation models to begin with.

The bookrunners, he says, likely felt that there was little chance of getting the deal done at par and that they would risk ending up with a worse pricing over all if they had decided to take a chance and launch at face value anyway.

ôIf you have to re-offer the bonds later on you often end up having to overcompensate investors as you have lost momentum in the book,ö he says.

Earlier this month, Greentown had to re-offer a $300 million equivalent renminbi-denominated CB, which was arranged by Lehman Brothers and UBS, at 99.5%. New World China Land's $325 million renminbi-denominated CB through Deutsche Bank had to be re-priced by increasing the yield to 0.75% from 0.375% after investors said no to the original terms, although those bonds did still sell at par.
¬ Haymarket Media Limited. All rights reserved.