Repeat Indian issuer brings $250 million CB

Sterling Biotech prices wide after demand is described as healthy but price sensitive.
Sterling Biotech, an Indian manufacturer of gelatine for use in pharmaceuticals, returned to the capital markets yesterday to raise $250 million from the sale of convertible bonds.

This is the first convertible of size from an Indian issuer since the ill-fated $175 million offer by Orchid Chemicals & Pharmaceuticals mid-February and as such was likely to attract a fair amout of interest within the CB community. However, before the market opened yesterday, Deutsche Bank completed a $110 million private placement for small-cap Indian hotel operator Hotel Leelaventure, which achieved a 50% premium and a 7.8% yield.

Sterling's offer was the third from the repeat issuer, which means most CB-focused investors are either familiar with the name or have at least come across it previously. Many of them would also have made money on the companyÆs previous convertibles.

Like GuocolandÆs CB that was in the market at the same time, Sterling fixed the price at the most generous end of the conversion price and yield ranges, but even so it was able to achieve a slightly higher conversion premium of 25% this time, compared with 21% on its more recent CB.

JPMorgan was the sole bookrunner for the CBs from both Sterling and Guocoland.

The bonds were offered to investors with a premium between 25% and 30%. Relative to the five-day volume-weighted average price (the reference price) of Rs163.661, the final premium gives an initial conversion price of Rs204.576. This is, however, subject to reset on the third anniversary down to a floor that is equal to the reference price at launch.

In addition, the reference price is already 5.2% lower than yesterdayÆs closing price of Rs172.65 after the share price gained 20.3% over the past two trading days.

The yield was fixed at 6.35%, which marked the top of a range that started at 5.75%.

One source says demand was strong, but quite price sensitive. They argued that this could have been due to the fact that the terms were already quite aggressive. The buyers included investors who already own the company's stock or CBs.

The underlying assumptions include a credit spread of 335 basis points, a stock borrow cost of 5% and a divided yield protection above 0.3%. This gave a bond floor of 90.7% and an implied volatility of 28%.
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