A $225 million convertible for Sun Pharma was completed after London's close on Wednesday. The deal represents the largest ever sole books offering from India and underlines JPMorgan's continuing aggression towards its equity-linked franchise.
The company initially mandated Merrill Lynch and Morgan Stanley to do a deal in April, before moving on to ABN AMRO, Deutsche Bank and UBS in late September. However, none of the five were able to complete a deal on terms, which reflected the white hot CB market of early Spring rather than the sobering reality of early summer.
JPMorgan appears to have broken through because it remained close to the company throughout the whole process and was there when it decided to adopt a more pragmatic approach to what was achievable. The US bank also had an advantage, having completed a successful $100 million CB for Indian drugs company Wockhardt in late September. This latter deal marked the first real benchmark from India since national elections, was priced sensibly and has since traded up to a bid price of 104.25%.
Terms for Sun Pharma's five-year deal comprise an issue price of par and redemption price of 125.594% to yield 4.61%. The conversion premium was set a 50% premium to the stock's spot close of Rs486.2.
The deal was bought outright by JPMorgan and was marketed with fixed terms. The company had previously been hoping to secure a yield as low as 3.65%, but was eventually prepared to cede some ground as long as it achieved its 50% target on the conversion premium.
Underlying assumptions comprise a bond floor of 94.8%, implied volatility of 33% and fair value of just over 100%. This is based on a credit spread of 175bp over Libor, zero borrow, a 0.7% dividend yield (the company is allowed to increase it by 20% each year) and historic volatility of 34%.
The credit spread is about 25bp wide of where it had been expected, but CB specialists point out that Indian credit spreads have been moving in and should continue to do so. As such, it is expected there will not be not more than about 15% asset swap in the primary market.
Wockhardt, for example, priced its deal with a 255bp credit spread in Late September. The five-year deal is now said to be trading as low as 200bp over. Like Sun Pharma it had a fairly chunk yield of 5.25% and an aggressive premium of 50% to its Rs324.05 close. It is currently trading on a yield of 4.307% and a conversion premium of 48.93%.
A strong underlying stock market has helped the entire CB universe and even the super aggressive tranche A of Tata Motor's CB has clawed its way back to a bid price of 88.25% compared to 84.37% when Wockhardt priced.
Year-to-date, Sun Pharma has appreciated 65.11% and is trading at a P/E high of 24 times 2005 earnings. It is India's fifth largest drugs company, with a speciality in chronic lifestyle drugs for heart disease, diabetes and by gynecological problems.
The share price rise has been supported by expanding EBITDA margins and profits, with the former increasing from 37.6% in June to 45.5% in September. Analysts say about 60% of its revenues derive from India and 40% overseas, particularly the US where it gains an advantage from owning its own distribution china and avoiding the 50% distribution margins that some of its domestic competitors cannot escape from.
The order book for the CB is said to have been highly targeted going to just over 30 accounts. Fund managers say they were told it was just under three times subscribed, which is quite surprising given the low number of accounts that participated. About 85% of the deal went to Europe and the remaining 15% to Asia.
Non syndicate bankers say the terms were aggressive but achievable. The company had originally hoped to raise up to $350 million and the lead manager has the option to feed more paper out to the market over a 30-day window and up to this limit.