Jaiprakash Power CB stirs up emotions

Jaiprakash Power Ventures, a developer and operator of hydroelectric power projects in India, yesterday raised $200 million from the sale of five-year convertible bonds. The deal attracted a lot of attention, both because of the timing -- it was launched late Tuesday as India was closed for a holiday and after a difficult day in other Asian markets -- and because it was re-offered below par.

The company had wanted to do a transaction for some time and several banks were sounding out the market for a deal after the company's board of directors on Monday approved the issuance of Rs25 billion ($537 million) worth of new shares and CBs. However, given the market environment and the reasonable expectation that Indian markets would be catching up with the slide in other Asian markets when they reopened yesterday, most banks on Tuesday advised the company to hold off and wait for a better window.

But Standard Chartered, which has a banking relationship with Jaiprakash, decided that it could do the trade even as others were pulling away and hard underwrote the deal at terms that were supposedly more competitive than what the other banks had thought possible on the day. It then went ahead and launched the transaction on fixed terms, including a re-offer price of 99.

Sources close to the deal say it went well and that Standard Chartered was rewarded for stepping up and taking the risk of launching a deal at a time when no-one else would with a "significantly increased fee" -- a fee that it then decided to share with investors. At the re-offer price, the terms were viewed to be reasonable and the deal was close to two times covered with just over 30 investors buying in.

However, rival bankers argued yesterday that the deal had not been fully distributed and rumours persisted late last night that the lead bank was still trying to offload bonds at prices as low as 95. The sources close to the deal denied this, and an investor who participated in the transaction said last night that there had been no indication that Standard Chartered had been long bonds. The investor also noted that while the CB had traded at 98.5 early yesterday, it then traded up to 99.5 and, even though Jaiprakash's share price fell 7.5% yesterday (the overall market lost 2.9%), the CB still held around 99 -- albeit in thin trading. At the end of the Asian trading session it was offered slightly below there at 98.875.

But the deal still stirred up plenty of emotion. Among the comments in the market yesterday was talk that Standard Chartered saw this as a chance to buy market share and gave up its fee to get the deal done by agreeing on terms that were not possible without a re-offer. Leaving aside the fact that sources said the bank did make money on the trade, perhaps the desire to get a foot in the door was a participating factor in its aggressive execution. Standard Chartered is a new name in the Asian CB market and taking some calculated risk may be needed for it to be noticed among the more established players. As long as it delivers what the client wants and investors get what they deem to be a reasonably priced deal -- a bank putting its capital at risk to support a client shouldn't be frowned upon.

Given that Standard Chartered already has a banking relationship with the Jaiprakash group, it is fair to assume that it knows the client well and thus was comfortable to support it at the terms it offered. However, while a source argued that the CB was offered at 99 straight off the bat, and that this therefore wasn't a sign that the deal was struggling, clearly Standard Chartered wouldn't have offered the deal at that level if it thought it would sell at par.

The CB was offered at fixed terms that included a 5% coupon, a 7% yield and a conversion premium of 16.5% over Monday's volume-weighted average price of Rs73.66. The VWAP was slightly above the closing price on the day of Rs73.20, which means the effective premium was a bit higher.

In accordance with Indian rules, the deal has no put, but an issuer call after three years, which is subject to a larger than usual hurdle of 150%. The deal also included an upsize option of $100 million, which wasn't exercised, but if the secondary market improves, the lead still has the option to do so until February 12.

The terms were based on a credit spread of 750bp, a 5% stock borrow cost and a full dividend adjustment for the first two years and an adjustment for dividend yields above 2% thereafter. This gave a bond floor of about 85% and an implied volatility of about 25%.

Sources close to the deal said the demand was split roughly 50:50 between Asian and European investors -- the latter were approached in the European evening just after launch while the Asian accounts were given a chance to place orders before the Indian market opened yesterday morning -- and about 75%-80% of the CB was bought by outright investors, while the rest was taken up by hedge funds. However, given that both the credit and the equity option are virtually unhedgeable, the hedge funds too would have bought the bonds for the equity story, which suggests that they are willing to look at the performance over a longer period than just the first day.

Jaiprakash Power has a good reputation when it comes to delivering on its projects and, contrary to many greenfield power producers that have come to market over the past couple of years, it has a long operating history and several operational plants, in addition to nine projects currently under development. Of the five analysts who follow the company according to Bloomberg, four have a "buy" on it. And on top of that, other entities within the Jaiprakash group have issued CBs in the past and investors have made money on those.

The money raised will be used for capital expenditures and any other purposes as allowed by the Indian regulator.