Investors stay tuned to Zee CB

A second Indian convertible pushes out aggressive terms.

Cable and satellite operator Zee Telefilms followed Tata Motor into the convertible bond market yesterday (Tuesday) with a smaller but only marginally less aggressive convertible bond deal. Terms for the $85 million deal were pitched either side of parity, then priced through it after order books closed more than 10 times covered despite a 10% cap on individual orders.

Such a reception might seem surprising given the initial trading pattern of Tata's two tranche deal, which fell below par before recovering slightly at the end of Asia's trading day. However, observers say Zee's pricing fell on the "sensible side of aggressive" and bought valuations back within the realms of reality after Tata pushed its deal a little too far.

Under the lead management of Citigroup and UBS, the five-year non-puttable deal was priced at the tight end of indicative terms. With an issue price of par and redemption of 116.54%, the deal has a 0.5% coupon and yield-to-maturity of 3.5%. Indicative terms were for a 0.5% to 1% coupon and yield of 3.5% to 4%.

The conversion premium was set at 35% to the stock's Rs146.10 close, again the tight end of a 30% to 35% range. There is also a call option after year two subject to a 120% hurdle and a 15% greenshoe. UBS, which has long been Zee's house bank, underwrote 70% and Citi 30%.

Underlying assumptions comprise a bond floor of 83.7%, theoretical value of 98.1% and implied volatility of 49.8%. This is based on a credit spread of 325bp, dividend yield of 1.8%, 5% borrow cost and 100-day volatility of 45%.

Terms were far more balanced than the two tranches for Tata, one of which was heavily equity-sensitive and the other more like pure debt.

Tranche B performed particularly poorly during secondary trading falling to as low as 96% before recovering to 98% at Asia's close. Some observers say this is because investors were expecting to get asset swap only to find that it had "disappeared" overnight.

Tranche A performed slightly better and was back at par by Asia's close.

"At least in this deal investors had terms that fell either side of par," comments one specialist. "But actually there was no price sensitivity in the book at all."

About 200 investors participated and few are said to have sought asset swap.

Year-to-date, Zee's stock price is down 3.8%, but up 115.31% on a one-year basis. Typically Asian media companies trade at a PE premium to their respective stock markets.

In Zee's case, it is currently trading at a slight discount - roughly 14.5 times 2004 earnings versus a 15.7 times average. Some analysts suggest this is because investors are waiting to see how the arrival of Star TV in India later this year will impact Zee's earnings.

Zee is expanding its 48 channel coverage to 96 channels over the next six months and proceeds from the new deal are being used to fund equipment purchases. Pre-deal Zee had about $110 million in net debt.

Last week it released fourth quarter earnings figures, which showed that net profit doubled to Rs876 million ($20 million) from Rs454 million.

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