Welspun chooses not to proceed with CB tender

The Indian company receives bids for about 50% of the $150 million convertible bond issue, but rejects them all as a falling rupee adds to the buy-back cost.
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Welspun is one of the world's biggest makers of large diameter pipes
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<div style="text-align: left;"> Welspun is one of the world's biggest makers of large diameter pipes </div>

Welspun Corp has rejected all the bids it received as part of a convertible bond tender that it launched on December 7 and has decided not to proceed with the offer, the company said in an announcement to the Bombay Stock Exchange on Friday.

The tender referred to a $150 million 4.5% CB that Welspun issued in September 2009 and which will mature in 2014. The bond was trading at about 80% to 82% of its principal value when the offer was launched and has hovered at a bid between 79% and 84% during the past couple of months.

The company, an Indian maker of steel pipes for transportation of oil and gas that was previously known as Welspun-Gujarat Stahl Rohren, said it received valid tender applications for about 50% of the outstanding CBs, or approximately $75 million, but “after reviewing the prevailing market conditions and prices at which the bonds were tendered [had] decided to re-evaluate its options and not proceed with the invitation to tender”.

The tender was always viewed as opportunistic and a way for the company to take advantage of the fall in the CB price to save on their interest payments and future redemption costs. But the fact that it decided not to buy back any bonds would have come as a disappointment to the bondholders, who saw the tender as a liquidity event and a chance to sell bonds at a price that was at least slightly above the market.

According to a source, it wasn’t so much the tender price that was the issue since the majority of the bids came within a couple of points of the current market levels, but rather the sharp depreciation of the rupee in recent weeks. A cheaper rupee means that it would have been more expensive for the company to buy back the CBs, which are denominated in US dollars. This may have been particularly tough since Welspun derives almost all of its revenues in the local currency.

The rupee has fallen from about Rs50 to the US dollar in mid-November to Rs53.6 on Thursday last week, a drop of 7.2%. It has depreciated 4.3% since the launch of the tender offer, although it did recover some ground on Friday after Welspun made its decision, finishing the week at Rs52.8 against the dollar.

The continued fall in the currency seems to have taken the company by surprise — even though the rupee has been moving in the same direction since early August. When it launched the tender it said it presented an attractive opportunity to repurchase bonds, but it seems that faced with the actual cost of a buy-back, it chose to preserve its cash.

Since the CB doesn’t mature until 2014 there is still a chance that it may convert into equity, although at present that does seem rather unlikely. The CB was issued just a couple of days after the stock hit a 52-week high and the share price has fallen 70% since then. So, even if it came with a low conversion premium of just 12.76% — for an initial conversion price of Rs300 per share — the share price is now trading well below those levels. It closed at Rs80.95 on Friday after falling 4.2% during the session.

The tender was structured as a reverse bookbuild, which meant the bondholders could submit bids with the number of bonds they would like to tender and at which price. The company would then decide on a final price where it would buy and all bids at or below that price would be honoured.

The source said about 20 investors had submitted an application to tender when the offer closed on December 9. The prices at which they offered to sell bonds were not disclosed, but according to sources the bulk of the offers came in a couple of points above the current market price. The company had been expected to fix the price somewhere between 85% and 90% of the principal value, which would have given investors a premium above the current market price, while at the same time allowing the company to buy back bonds below par. As per Indian regulations, a buy-back has to be done at a discount of at least 8% to the accreted price, which means the maximum tender price would be 92%.

The tender was managed by J.P. Morgan, which was also the sole bookrunner when the five-year CB was first issued.

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