Jaiprakash Associates, an Indian industrial conglomerate, has raised $150 million from a five-year convertible bond that it said it will use towards the redemption of a larger outstanding CB that matures on September 12.
The deal, which launched late on Tuesday evening and was completed yesterday morning, was reasonably well received, but the use of proceeds made some investors a bit nervous, particularly since the company had previously said that it had enough cash to repay the outstanding CB. To then do a deal just two weeks before it matures did spark some uncertainty about the company’s finances and the share price dropped as much as 10.3% intraday before recovering to finish the session 9.2% lower at Rs64. The CB fell to about 98 at one point, but by mid-afternoon Hong Kong time, it was said to be trading at 99 to 99.5.
“There are more question marks about the company now than 48 hours ago,” one market participant said after the deal yesterday.
One source said the reason the company had chosen to do a CB before redeeming the outstanding deal was to enable it to use the proceeds for the redemption and preserve its cash for other purposes. Indian regulations are otherwise quite strict about how you can use the proceeds from a foreign currency convertible bond, he said and noted that the fall in the share price may have been partly caused by some hedging of the deal as there are futures available in the name. According to the term sheet for this latest deal, the total redemption amount of the outstanding CB is $523.6 million.
Jaiprakash, whose businesses include engineering and construction, cement, power, hospitality, real estate and expressways, is viewed as one of the stronger names in the Indian CB market and CB investors hadn’t really worried that they wouldn’t get repaid. Aside from the outstanding bonds, the company has previously issued two other CBs, both of which have converted to equity. So, even with the background noise the deal did get done, although the conversion premium was fixed at the investor-friendly end and the upsize option wasn’t exercised.
The deal had a base size of $150 million plus an upsize option of $50 million, but as the demand wasn’t strong enough to put that to use the final size was capped at $150 million.
It came with a fixed coupon and yield of 5.75%, which was close to the maximum that it could offer. Indian regulations stipulate that the coupon cannot exceed Libor plus 500bp.
The conversion premium was offered at 10% to 20% over Tuesday’s closing price of Rs70.45 on the National Stock Exchange.
As noted the premium was fixed at 10% for an initial conversion price of Rs77.50. This was no surprise since the high coupon resulted in a bond floor of about 84% to 85% and an equity option of 15 points would typically require a low premium.
At a credit spread of about 900bp the implied volatility worked out at 21%, one source said. This compares with a 100-day historic vol of about 40%. The credit spread was based on the trading levels of Jaiprakash’s own outstanding CB, as well as those of Jaiprakash Power and other double-B rated Indian credits.
The conversion premium will be adjusted for dividends exceeding either a yield of 1.4%, or 125% of the regular cash dividends paid in the previous year. With no stock lending available in India, the stock borrow cost was assumed at 5%.
Instead of a call, the CB comes with a mandatory conversion after three years and 21 days, subject to a 130% hurdle.
The deal attracted about 25 investors and the demand was split evenly between outright investors and hedge funds, although a bit in favour of the former. About 50% of the demand came from Asia-based accounts, some 35% from Europe and the rest from the US. The bookrunners – Barclays and Standard Chartered – had supposedly done a lot of pre-marketing and had good indications of buying interest before launch. Much of that materialised quickly and the deal was covered within two hours, the source said. However, since the deal didn’t launch until about 9:45pm Hong Kong time, the banks chose to keep the order books open until about 8.30am yesterday.
Even with the issue surrounding the use of proceeds and the timing of the deal, some investors seem to have welcomed the opportunity to put money into a CB of a high-profile Indian company again. The market has been virtually non-existent in the past 12 months and aside from a $130 million deal by auto parts maker Amtek India in March, which was 100% backed by credit default swaps, there have been no other Indian CBs issued this year. Instead, most of the activity so far has centred around distressed situations and restructurings of existing deals.
In that sense, this deal could be viewed as a reopening of the market. However, it remains to be seen if it will be followed by others. According to CB bankers, there are more potential deals in the pipeline, but it is still unclear whether investors will like the terms that the issuers are able to offer.
