Sesa Goa and Welspun re-open India's CB market

After a gap of 18 months with no issuance, the Indian convertible bond market sprung back to life with two deals on Thursday last week. Welspun Gujarat Stahl Rohren, a manufacturer of steel pipes for energy transportation, raised $130 million from a five-year CB that was upsized from $110 million; and Sesa Goa, an iron ore mining company based in Goa, raised $500 million, also from a five-year deal.

The Sesa Goa deal attracted a lot of attention with some observers saying they felt the deal may have been too aggressively priced for an issue that was meant to re-open the market after such a long hiatus. Contrary to Welspun and SJM Holdings (see separate story on today's website), the Sesa Goa bonds also traded down in the aftermarket, which prompted speculation that the bonds had to be reoffered, or at the very least that the bookrunners had been unable to sell the entire deal.

Sources close to Goldman Sachs and Morgan Stanley, which were the joint bookrunners, denied that this was the case, however, and noted that the books had been closed at about 10.30pm Hong Kong time after just 2.5 hours. Had the deal not been covered, it could have remained open into the Asian morning. Investors also confirmed that the final term sheet that was sent out did say that the CBs were sold at par.

Instead, the sources cited concern that the Indian market would open lower on Friday as the main reason why the bonds fell below par -- a reasonable assumption given the sell-off in the US overnight and a sharply lower opening in other Asian markets. And the projections were indeed correct with India's benchmark Sensex index falling 0.5% during the course of Friday's session and Sesa Goa's share price shedding 5.6%. The CB dropped to about 98% of face value in the secondary market, in quite thin volumes, which sources say was a reflection of the fact that most of the buyers in the primary market intended to hold on to the bonds in anticipation of another commodity price boom. Also, since you cannot short-sell Indian equities, there isn't a very strong hedge fund bid in this name.

The CB was offered with a coupon between 4% and 5% and a conversion premium ranging from 28% to 38%. The premium range in particular, which was set over the previous day's volume-weighted average price of Rs271 in Mumbai, was punchy and it was no surprise that it was fixed at the bottom of the range at 28%. The share price has gained 185% this year already and premium gives a conversion price that is 22% above the company's all-time high that was set two days earlier. As with all Indian five-year CBs, the bonds don't come with a put, but there is an issuer call after three years subject to a 130% hurdle.

The coupon too was fixed at the investor-friendly end at 5%, and thanks to a par-in-par-out structure, this will also be equal to the yield.

Sources close to the deal said the CB was primarily a bet on China's ongoing demand for steel, as Sesa Goa sells about 80% of its iron ore to Chinese steel makers. Some 70% of its ore is also sold in the spot market, which means it is highly exposed to increases in the selling price. And if the iron ore price goes down, then the bondholders will collect a 5% coupon, making the CB something of a low-risk commodity play. This is particularly true since the company is viewed as a very defensive name from a credit perspective, being 57% owned by the Vedanta Group. It generates $500 million Ebitda from its existing mining operations every year and, aside from this convertible, has a debt-free balance sheet.  

The company said it would use the proceeds to fund expansion, which will include the development of its existing mines and a search for new mines to explore.

According to sources, the deal attracted a few very large orders and the final order book was quite European-heavy. All of the top-five orders were also said to have been outright in nature. More than 40 investors participated in the deal.

The bonds were marketed with a credit spread of 500bp, a stock borrow cost of 5% and protection for dividend above a 1% yield. This gave a bond floor of 89% and an implied yield of 26%.

Welspun had a completely different structure with a relatively low premium and an annual coupon plus a back-ended yield. Sources say the demand was good overall with the total issue multiple times covered, which allowed the company to exercise half of the $40 million upsize option. The remaining $20 million can still be used if the bonds perform well in the secondary market, and could lead to a further increase of the deal to $150 million.

However, the demand was said to have been very price sensitive, which resulted in the terms all being fixed at the investor-friendly end. The conversion premium was fixed at 12.76% over Thursday's close in Mumbai of Rs266.05 after being offered in a range up to 17.76%. The somewhat odd premium number was set that way to enable a nice, even, conversion price of Rs300. At the time of the CB, the stock was trading close to a 52-week high of Rs275.50 reached a couple of days earlier.

The coupon was offered at 4% to 4.5% and the yield to maturity was marketed at 4.5% to 5%. They were fixed at 4.5% and 5%, respectively. The deal carries a mandatory conversion feature after three years at the request of the issuer, subject to a 130% hurdle.

The deal was said to have attracted a mix of outright funds and hedge funds and it traded up in the aftermarket on Friday, reaching 101.5 to 102 by the late Hong Kong afternoon.

The bonds were marketed with a credit spread of around 800bp, a stock borrow cost of 5% and protection for dividend payouts corresponding to a yield above 0.56%. At the final terms this gave a bond floor of 78% - aggressive, but likely possible because of the low premium - and an implied volatility of 29%.

The company said it will use the proceeds to import plants and machinery, to make investments in is subsidiaries and joint ventures outside of India, for potential overseas acquisitions and for general capex purposes.

J.P. Morgan was the sole bookrunner for the Welspun offering.