Part of the excitement was likely due to the sector, with India-based Suzlon being the largest wind turbine manufacturer in Asia, but there is a lot more at stake here as the company is currently involved in an ambitious takeover battle for its largest German competitor, REpower Systems. If successful, the acquisition will likely have a significant negative impact on SuzlonÆs credit, which could lead to the CBs cheapening very quickly. If that was to happen, the equity option would likely be worth a lot more, however.
Alternatively, if Suzlon fails and doesnÆt need to put together a sizeable debt financing package, the credit is poised to tighten.
At this point, few observers think the Indian company will prevail, as rival bidder Areva (a French nuclear energy group) is more than twice its size and consequently has the greater ability to raise funding. However, the escalating bidding contest has been going on for three months already.
ôThere is an optionality here that the credit will tighten and this is also a very exciting space,ö one observer says with regard to the strong interest.
Also, there havenÆt been that many CBs out of India this year, making this an interesting alternative to the Mainland real estate companies that have been dominating Asian issuance over the past month, he adds.
Being a $9 billion market cap company, with a potential acquisition of $1.5 billion to $2 billion ahead of it, Suzlon would need to take on a substantial amount of leverage if it is successful. Preparing for this, and perhaps to give it more clout in the bidding, sources say the company wanted guaranteed funding at a fixed price of Rs1,800 per share.
The backdrop for achieving this wasnÆt the best, however, with the credit moving all over the place in recent months as a result of the takeover battle. And on Tuesday the company released earnings that were below expectations, which sent the share price tumbling 7.6%, wiping out a significant amount of much needed equity value.
Still, it seems Deutsche Bank was happy to agree to the companyÆs request for funding certainty by buying $200 million worth of CBs on that price condition. While such deals arenÆt uncommon in the investment banking world, they are usually done on a private basis. This deal, on the other hand, was also offered to the market in the form of a $100 million upsize option.
Deutsche Bank acted as the sole bookrunner for the portion of the deal that was sold through the market.
The CB was offered to investors at the same fixed terms Deutsche had agreed to, including the conversion price of Rs1,800. Relative to yesterdayÆs volume weighted average price of Rs1,127 that translates into a conversion premium of 59.6% - only slightly below the previous dayÆs CB deal for Noble Group, which was sold at a fixed conversion premium of 65%.
Based on yesterdayÆs closing price for Suzlon of Rs1,134.75 on the Mumbai Stock Exchange, the premium comes down marginally to 58.6%. The deal carries a conversion price reset after one year down to the market price at the time plus 40%. There is also a mandatory conversion feature after two years, subject to a hurdle of 120%, which means the issuer can require conversion if the share price does perform.
The five-year, zero coupon bonds offer a yield to maturity of 7.6%.
Given the uncertain outlook for the credit, Deutsche Bank offered no credit protection, and sources say investors were buying the bonds on assumptions of a credit spread ranging from 350bp to 400bp. Including a 5% stock borrow cost and a dividend yield protection above 0.35%, a 350bp credit spread results in a bond floor of 95%, while a 400bp spread gives a bond floor of 93%.
The implied volatility came out at around 30%, compared with a historic volatility of about 55%. The stock has been whipped about quite a bit since the beginning of this year and at one point in early April it was down as much as 27%. As of yesterdayÆs close the share price decline year-to-date had narrowed to 13%.
Neither the share price decline, nor the earnings disappointment appeared to have much impact on the demand for the bonds, however. According to a source, more than 100 investors piled into the offering and ordered enough bonds to cover a deal several times its size despite the fact that the books were open for less than two hours in the early evening Hong Kong time. The bonds were widely distributed and later in the evening they were said to be trading at around 102% of face value in the grey market.
Both Suzlon and Areva have made public offers for the outstanding shares in REpower, but neither has managed to secure enough shares at this stage to gain a majority, with Suzlon currently holding a 30.9% stake versus ArevaÆs 30.2%.
SuzlonÆs offer is the highest at Ç150 per share, valuing the German company at about $1.6 billion, while Areva is offering Ç140 per share. Both offers are well above ArevaÆs original offer of Ç105 per share which was made on January 22, but below REpowerÆs current market price of about Ç160. Shareholders have until May 25 to decide whether to sell to either company.
According to media reports, the reason none of the two companies are able to buy enough shares for a takeover is because the remaining stocks are in the hands of a small amount of major investors who are not willing to sell.
Suzlon is bidding together with Portugal-based Martifer through a 75:25 bidding consortium, but the Indian company has committed to financing the entire offer on its own.
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