The five-year deal, which was jointly arranged by Citigroup, Deutsche Bank, Morgan Stanley and UBS, is the second largest CB out of India after HDFCÆs $500 million bond last year and the largest ever from an Indian pharma company.
Ranbaxy is IndiaÆs largest pharmaceutical company and ranks among the top 10 producers of generic medicines worldwide, according to its Web site.
The zero-coupon bond was launched after the Indian stock market closed on Wednesday (February 15) and initially proved a tough sell. Typically, over aggressive pitching to win the mandate meant the terms were untenable and the deal ended up having to be offered at 99%, with the leads losing most of their fees.
After marketing the deal on a 4.3% to 4.8% range, the discounted pricing meant that the end yield came out at 5.1%, with the redemption price set at 126.8%. There is a standard three-year issuer call, subject to a 130% hurdle.
The main sticking point with investors was the conversion premium of 60% above WednesdayÆs close of Rp447.70. This was fixed before launch and was the highest for an Indian CB since Tata Motors got away with the same level premium in 2004.
The premium seemed especially high since RanbaxyÆs share price has fallen 17.8% in the past 12 months and was the worst performer in the Sensex Index in 2005. However, it has gained 19% so far this year as investors have become more bullish on the sector amid expectations of earnings-enhancing acquisitions and rotational buying.
In the recent past, a number of Indian issuers have got away with 50% plus premiums. Going forwards this seems increasingly unlikely given that investors have become increasingly sceptical about the upside potential of the Indian market. Many, indeed, have stated their intention to pull out on the basis that it has overshot itself.
To help investors to establish a benchmark for the credit, the four underwriters offered credit protection for 50% of the deal. That offer, as well as the fact that Ranbaxy is considered a bluechip credit in the Indian market, is said to have enabled investors to overcome their concerns about the high conversion premium and in the end between 150 and 200 accounts were said to have bought into the deal.
At the reoffer price, the book was estimated to have been between 1.5 and two times covered.
The bond traded on both sides of the 99% issue price yesterday, according to traders, while RanbaxyÆs share price fell 3.5% to Rp431.85 as investors digested the potential dilution. The benchmark Sensex index gained 0.1%.
The underlying assumptions for the Ranbaxy bond include a credit spread of 90bp over Libor, which gives a bond floor of 94%. The dividend yield was assumed at 2.2% and the stock borrow cost at 5%.
This gave a high implied volatility of 35.7%, which compared with an historic volatility of 41%.
Earlier this week Ranbaxy said that it had submitted a bid for a generic pharmaceuticals company in Germany, which, if successful, would account for a ôsignificant proportion of the groupÆs net assets, revenues and earnings.ö Yesterday, however, it emerged that Ranbaxy had been outbid by local rival Dr. Reddy, which announced it would pay $570 million to buy the German drug maker ûidentified as Betapharm Arzneimittel.
The local Indian press has rcently been reporting unconfirmed rumours of other possible takeovers in Europe, however, and this has been one of the drivers for the share price this year.
Still, the fierce competition among Indian generic companies in the US is putting downward pressure on margins and RanbaxyÆs strong focus on overseas acquisitions is making its earnings outlook quite uncertain. As a result, analysts have mixed views on the company and just over half the analysts listed by Bloomberg Data have a sell on the stock.
The company posted 56% decline in net profit in the fourth quarter of last year to Rp686 billion - its fifth straight quarter of declining profits - as competition in the US eroded sales. However, the earnings did beat consensus estimates.
The full-year profit declined 63% to Rp2,591 billion.