United Phosphorus, one of the world's top five generic agro chemical companies, raised $140 million from a two tranche CB last Friday (December 9). The UBS-led deal differs from most Indian CB in that it forsook a hefty conversion premium in favour of a high degree of equity sensitivity.
The deal is split into two tranches, of which tranche A is effectively equity. This $60 million tranche was priced at par and has a zero coupon, zero yield structure, with mandatory conversion on 17 February 2006 at a 4% premium to the stock's close last Thursday Rs217.65 per share. There is also a $10 million greenshoe.
Tranche B has a more vanilla CB structure and raised $80 million with no greenshoe. This five-year tranche has an issue price of par, coupon of 0.5%, yield of 5.875% and redemption price of 130%. It was marketed on a range of 5.625% to 6.125%.
The conversion premium was set at 18% to Thursday's close, but steps up to 25% in year two. This structural tweak was designed to persuade investors to give up some of their optionality and convert the deal early.
The same logic has been applied to the call option. The deal is callable at the end of year one subject to a hurdle of 140% of the accreted principal amount (105%). In year two this steps down to 135% of 111% and in year three to 130% of 118%.
Underlying assumptions for tranche B comprise a bond floor of 92.8%, implied volatility of 28% and theoretical value of 100.5%. This is based on a credit spread assumption of 265bp over Libor, 5% borrow cost, 2% dividend yield (the stock currently yields 1%) and a historic volatility assumption of 30%.
The deal was not widely marketed - tranche A was placed with about 16 investors and tranche B with roughly 20 investors. There was almost no overlap between the two.
Three investors in tranche A were allocated 50% of the deal, with the remaining $30 million about three times oversubscribed. Similarly one investor took 25% of tranche B, with the remaining $60 million about two times oversubscribed.
When the company initially began marketing a deal to investors it planned to launch a single tranche CB with a low conversion premium to encourage early conversion. However, specialists say a number of accounts indicated their desire to purchase straight equity through the primary market given it is difficult to build big secondary market positions in a stock, which trades about $1 million a day.
But launching a straight equity deal was complicated by new Indian regulations covering minimum floor prices for deals. Tranche A was the solution.
Year-to-date, United Phosphorus is up 41.75% and is currently trading on a forward P/E of about 17 times. Since the beginning of November, when the company won board approval for a new offshore deal, the stock has traded down from the Rs238 level.
On full conversion the new deal will account for 16% of the enlarged share capital. The group's major shareholder is the Schroff family, which owns 33%.
Over the past year, the company has been expanding overseas and proceeds are being put towards future acquisition opportunities. In late 2004, United Phosphorus purchased Agvale in the US. This year it has bought Shaw Wallace Agrochem in India, Cequisa in Spain and most recently Reposo in Argentina.
For the second quarter of the 2006 Financial Year (June to September), the company saw revenues grow 16% year-on-year and was able to expand its net profit margin from 6.9% to 8.6% thanks to lower raw material costs.