Videocon brings first Indian CB in five months

Videocon Industries, an Indian conglomerate with businesses ranging from consumer electronics and home appliances to mobile communications and oil production, on Thursday raised $200 million from the sale of five-year convertible bonds.

This is the first CB by an Indian issuer since early July when Shiv-Vani Oil & Gas Exploration Services sold $80 million worth of five-year bonds. But this deal was in the making even before that with the company getting shareholder approval for the fundraising on June 22. Indeed, the terms indicate that it wasn’t an easy sell. The bonds were offered with a coupon and yield between 6.25% and 6.75% and a conversion premium ranging from 3% to 10% over Thursday’s closing price of Rs232.55, and both were fixed at the most favourable terms for investors. However, part of that was a trade-off for the fact that the deal was doubled in size from an initial $100 million.

The CB was initially launched at a base size of $100 million with an upsize option of $50 million, but after attracting $400 million of demand following two-and-a-half hours of bookbuilding, the issuer and joint bookrunners Credit Suisse and Standard Chartered decided to increase it by a further $50 million. In accordance with Indian regulations, there is no put, but an issuer call after three years, subject to a 130% hurdle.

Videocon is highly leveraged and viewed as a high-yield credit (although it is unrated), prompting sources to say the terms were necessary to get the deal away. There is also no stock borrow. The low conversion premium was also partially a function of the fact that Indian regulators don’t allow the coupon to be set more than 500bp over the swap rate. As a result, investors had to be compensated for the difference between the coupon they deemed to be fair and the actual coupon at 6.75% by getting a lower premium. The company also didn’t want to include a reset of the premium, in which case the initial premium could have been set slightly higher. At 3%, this is the lowest premium on an Asian CB this year.

The closest comparable appears to be Core Projects & Technologies’ $80 million CB in April this year, which came with a 7% coupon and a 10% premium. The Indian education company did offer a reset on the first and second anniversary down to the 10-day volume-weighted average price at the time.

That said, one source noted that Videocon would have had difficulties raising straight equity since Indian regulation also caps the discount versus the prevailing market price at a level that would be viewed as too tight by most investors. Hence, even at a 3% premium, a CB was a good alternative. According to the term sheet, Videocon will use the proceeds to fund capital expenditure on new and existing projects and for overseas direct investment in joint ventures and wholly owned subsidiaries, as well as for any other purposes as permitted under Indian law.

The source said the bonds were well received at the final terms, with more than 65 accounts participating in the trade. The buyers comprised a good mix of hedge funds and outright investors, which wasn’t too dissimilar to the types of investors who bought Kaisa Group Holdings’ $225 million five-year renminbi-denominated CB with a three-year put earlier in the week. The positive response to the Kaisa CB was said to have given Videocon the confidence to finally go ahead with its transaction. A high-yield Chinese property developer, Kaisa came with a fixed premium of 20% and priced the deal with an 8% coupon. That bond was arranged by Credit Suisse on a sole basis.

The CB was issued at par and traded slightly lower, at 98-99 in the secondary market on Friday. However, some of that may have been due to a huge 12.3% drop in the share price to Rs203.90. The sharp decline suggests that existing shareholders were not too happy with the potential dilution – which thanks to the low conversion premium could happen quite soon if the share price heads higher again. The stock last traded at the initial conversion price of Rs239.5265 in mid-November, but it is currently on a declining trend from a 2010 high of Rs291.10 in early October. It is still above the year’s low of Rs187.70 from early June, but the latest decline means it is now down 15% this year.

At a credit spread of 1,200bp to 1,300bp, the bond floor works out at about 74% and the implied volatility at 20%. The deal comes with a full dividend pass-through and the stock borrow cost is assumed at 5%.