Tata Motors brings yen-denominated CB with negative yield

Indian truck and bus maker raises $100 million in third offer since 2003.
Tata Motors became the second Indian issuer to sell yen-denominated convertible bonds this year when the manufacturer of cars, trucks and buses completed a Ñ11.76 billion (about $100 million) offer in the early hours of Thursday morning.

The Citigroup-led deal was also unusual in that it has a negative yield, a structure not seen in Asian markets for over a year. Tata Motors itself was the first ever Indian issuer to offer a negative yield on one of the two tranches of a US-dollar denominated CB sold in 2004.

The company has issued three CBs since 2003 with Citigroup being involved in all of them. This is the first time the bank has acted as sole bookrunner, however. Citigroup, together with ABN AMRO, also brought a $100 million equivalent yen-denominated CB for Indian engineering equipment manufacturer Larsen & Tubro in early January.

The new bonds have a five-year maturity and were issued at par, with redemption at 99.25%, giving a negative yield to maturity of 0.15%. They are convertible into ordinary shares or American Depository Shares at Rp1,001.39 per share, which is equal to a 30% premium over WednesdayÆs close on the Bombay Stock Exchange.

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

The valuation assumes a credit spread of 110bp over Libor, which gives a bond floor of 88% and an implied volatility of 34%. Given that historic volatility is about 35-36%, the bond appears quite expensive, and this becomes even more obvious when looking at the previous CB from 2004.

The largest $400 million tranche of that bond, which does not mature until 2011 and is still all outstanding, trades at a 15% premium and has an implied volatility of 27-28%. That bond was originally issued with a 60% conversion premium.

Tata MotorÆs share price has soared 58% in the past 12 months as the company has continued to deliver on earnings.

The deal, which was done partly to use up the balance of an approval to raise money offshore before it expired, was launched at 3am Hong Kong time and allocated before the market opened to roughly 30 accounts. Consequently, Asian investors took no more than 20% of the offer, with 50% going to Europe and 30% to offshore US accounts. About 58% of the deal went to outright investors, while the rest ended up with hedge funds.

Last Friday, Tata Motors reported a forecast-beating 46% rise in net profit for its fiscal third quarter (October-December), driven by a combination of cost cuts and price increases. The results helped underpin another push upward in the share price, which gained 4.06% yesterday to a new record close of Rp800.1, despite the CB issue.
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