Software company issues first Indian CB for 2008

The $125 million deal for Geodesic Information Systems is offered "club-style" to a small number of investors as a way of overcoming aggressive pricing.
Indian software provider Geodesic Information Systems became the first Indian company to sell convertible bonds this year when it completed a $125 million issue late last Thursday. The money will be mainly used for overseas acquisitions and investments in joint ventures.

The company has a history of acquisitions since its incorporation in 1999 with three deals completed in 2005 alone.

The pricing was aggressive with a 35% conversion premium and a reset that kicks in later than usual, and given that there was also no borrow available, sole bookrunner Citi chose to offer the deal on fixed terms to a small group of investors only. This focus on the top Indian CB players enabled the bank to spend time with each investor to make sure they understood the equity story.

ôThis was a deal that was only going to appeal to people who had done the work,[but] it is a great equity story and the company also has good momentum,ö says one source.

The club-style strategy appears to have worked as the issue attracted sufficient demand from the 15 investors who came into the deal. The fact that the company wasnÆt necessarily 100% set on doing a CB, but kept other fund raising options open, may have contributed to the willingness among investors to pay a bit extra to get their hands on the paper.

Further evidence of this came on Friday when the bonds reached almost 101% of face value in thin trading, albeit supported by a 5.8% intraday gain in the share price. The price fell back towards the end of the session, however, closing down Rs0.20 at Rs223.70. The five-year, zero coupon bonds were issued at par.

The yield to maturity was fixed at 6.6% and the conversion premium was set over ThursdayÆs close of Rs223.90 on the National Stock Exchange of India for an initial conversion price of Rs302.27 û a price that is well within the stockÆs 52-week trading range which peaked at an intra-day high of Rs415 in late July. This conversion price can be reset after 18 months down to a floor of 90% and after two years down to 80% of the initial conversion price. Typically, the reset would kick in after 12 months for similar premiums with floors down to 70% or even 60% of the initial conversion price in later years.

There is an issuer call after three years, subject to a 130% hurdle.

As noted earlier, Citi didnÆt offer any credit protection, which sources say has never been done before in an Indian name with a conversion premium as high as 35%. This would have been especially challenging given how asset-light the company is. At least some of the investors used a 450 basis point spread as a reference, which gives a bond floor of 91% and an implied volatility of 31%. The latter compares with a 100-day volatility of about 56%. Part of the reason for the high historic volatility is that the share price has fallen significantly from the late July highs. However, it has come off a low of Rs178.70 on October 31.

The other basic assumptions include a 5% stock borrow cost and compensation for dividends that exceed 0.2% of the average market price.

With a market capitalisation of only about $520 million, Geodesic is probably best known for the Mundu instant messaging system, which allows users to integrate content and send messages between different platforms such as AIM, Google Talk, ICQ, MSN, Yahoo and the Mundu Messenger system itself. It is also available for use with mobile devises and a version of Mundu specifically designed for the Apple iPhone has been voted the best application on the new phone since it was launched in June 2007. Currently more than six million people use this service through associate sites, system integrators and partners, according to the companyÆs Website.

Geodesic also offers a range of other high-intelligence software that facilitates global interaction for both business and personal communication. Its long-term mission is ôto build a global community without barriers and connect people across the world.ö This is reflected in the name ôgeodesic,ö which refers to the shortest route between two points on the surface of the earth.

This is the second equity-linked deal that Citi has completed this year, having also arranged the $600 million exchangeable into Malaysian palm oil producer IOI Corp. Other banks have yet to bring their first Asian CB, although market watchers are optimistic that there will be a fair amount of issuance in the first quarter, given the high volatility levels.
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