Italian-Thai convertible upsized to $150 million

The deal, which is only the third CB from Thailand since 2002, is completed without stock borrow or credit protection, making it something of a rarity.
ThailandÆs largest infrastructure construction company Italian-Thai Development has raised $150 million from the sale of convertible bonds, which were well received and sent a positive message to the market about what can and cannot be done these days.

The JPMorgan-led offering, which was launched and priced late on Monday, had a base size of $100 million plus an upsize option of $50 million, of which $35 million was exercised immediately. The remaining $15 million were sold yesterday as the bonds traded up to about 102.00-102.50. They have a five-year maturity, but can be put back to the company after three years.

This was the first CB to be completed by an Asian-listed issuer in a month and only the third from a Thai issuer since 2002. The latter meant there was definitely some scarcity value attached and the issuer likely also drew interested on the back of the fact that Thailand is the second best performing stockmarket in Asia so far this year with a 3% gain (behind Taiwan with 6%).

More importantly, Italian-Thai is one of the few equity-linked transactions this year to provide neither credit protection nor stock borrow. The absence of stock borrow, which has become almost a requirement on Asian CBs as the market for credit default swaps has dried up and made it virtually impossible to hedge the credits, was partly due to it being difficult to engage in stock lending in Thailand. But the fact that a deal could get done without it was nevertheless encouraging.

It obviously helped that the conversion premium was fixed at a modest 13%, after being offered in the range of 10% to 15%, but investors likely also accepted the outright buying because of a relatively positive equity story as a result of the governmentÆs renewed focus on infrastructure developments. Italian-Thai already has a large order backlog of construction projects and managed to improve its gross margins in the first quarter despite the increase in steel and oil prices.

However, its net profit fell 72% in the first three months this year from a year earlier and was down 43% from the previous quarter, largely because of a higher effective tax rate, and many analysts argue that the stock is fully valued after gaining 72% in the past 11 months. The share price closed at a record high of Bt9.40 on Monday (it reached the same level in early April), before the launch of the CB.

Some analysts, including JPMorganÆs Maria Lapiz, see a potential for a re-rating of the stock, though, due to the companyÆs move into mining of potash and bauxite. The two mines are expected to be operational within two years and Lapiz argues that the bauxite mine in Laos could be worth Bt4.10 per share, while the potash mine in Thailand could add Bt12.20 per share.

ôThe combined value is 1.8 times the companyÆs market capitalisation, therefore there is a possibility of a re-rating,ö Lapiz says. She currently has an ôoverweightö recommendation on the stock and an end-2008 target price of Bt11.

Others are more cautious about the potential for additional gains and 10 of the analysts who follow the company, according to Bloomberg, rate it a ôsellö. This compares with seven recommendations to ôbuyö and four to ôholdö. But with JPMorgan being the sole bookrunner on the CB transaction, the re-rating angle is likely to have got quite a bit of play during the marketing of the bonds.

According to a source, the deal was allocated to more than 25 investors and multiple times subscribed even though it was kept open for only one hour. The demand was split between hedge-funds and equity-focused long-only accounts, with perhaps a small bias for the former.

The bonds were launched with a fixed coupon of 4.5% and a yield ranging from 7% to 8%. It was priced at 8%, which reflected the fact that the credit is not that strong. Indeed, the bookrunner was said to have suggested a credit spread of 800bp over Libor as it marketed the deal.

According to the source, the company is unlikely to have been that concerned about the yield, however, as its primary target was to achieve an equity-like structure that is likely to convert û thus the low premium. The bonds carry a mandatory conversion feature, as opposed to the usual soft call, which will kick in after two years subject to a 130% trigger.

The conversion premium was also set over the five-day volume-weighted average price which at Bt9.1281 was well below the latest close of Bt9.40. As a result, the effective conversion premium at the time of pricing was no more than 9.7%. However, the share price fell 3.7% yesterday after the deal was completed, which meant the premium widened out again.

Based on the bookrunner's credit assumption, a protection for dividend yields above 1% and a 5% stock borrow cost, the bond floor was about 91.5% while the implied volatility ended up in the low 20s.

The most recent CB by an Asian issuer before this one was the $285 million renminbi-denominated offering by China High Speed Transmission on April 22. The three-year deal, which was arranged by Morgan Stanley, featured a zero coupon, a 30% premium and a 3% yield. It also had a borrow facility that was created through an equity swap between the issuer and the bookrunner.
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