Indian auto parts manufacturer Samvardhana Motherson Autosystems Group BV (SMRPBV) completed its debut dollar bond overnight on Wednesday, with analysts speculating proceeds will fund a US M&A deal.
The Uttar Pradesh-based company has been expanding rapidly in recent years and wants to quadruple revenues by 2020 through a 50/50 mix of organic and inorganic growth.
This expansion is highly likely to be funded by increased borrowings given the documentation for SMRPBV's $300 million December 2021 deal (callable 2019) allows for "significant additional debt", in the words of S&P.
This factor and the company's less well-known brand name were two key reasons why its bond deal offered an attractive premium over nearest comparable Tata Motors.
However, syndicate bankers commented that, since Tata Motors does not provide a direct benchmark, investors' fair value estimates spanned a very wide 1%-5% range.
But pricing at par on a coupon of 4.815% appears to have been the sweet spot given the deal traded up to 100.375%/100.875% during Asian hours on Thursday.
The BB+ rated senior secured transaction had initially been marketed around the 5.25% level before indicative pricing was tightened in by 37.5bp. This led to a peak order book of $1.4 billion before dropping to $1.1 billion, with participation from 140 investors.
By geography, the Reg S deal was split 60% Asia and 40% Europe/Middle East. By investor type, 66% went to fund managers, 17% to banks, 16% to private banks and 1% to others.
"We spent a lot of time explaining their business and so did the company," one syndicate banker said. "We started at the 5.25% level since we knew we'd get critical mass there and most investors worked with us down to 4.875%, confident in the execution."
A second syndicate banker added, "At the end of the day most investors felt this deal needed to come at a premium to Tata Motors after factoring in the less well-known brand name, rating differentials and status within the capital structure.
"Tata Motors is also not a direct comparable because it is much more liquid and trading at technically tight levels."
Ba2/BB rated Tata's 4.625% April 2020 senior unsecured bonds were trading on a mid-price of 104.25% to yield 3.43% on Thursday. The secondary market trading levels of the group's bond complex suggests a one-year maturity extension would bring a new 2021 bond out around the 3.73% level.
This means that one notch higher rated SMRPBV has offered more than a 100bp premium.
The group also has two outstanding euro-denominated bonds, which were issued in 2014 and 2015. The new deal has priced through both on a like-for-like basis.
A 4.125% July 2021 bond (callable 2017) was trading on a yield-to-worst of 3.529% on Thursday, while a 3.7% June 2025 bond was at 5.392%.
One big factor in the deal's favour was its rarity value. There has been very little high-yield issuance from Asia recently and nothing from India in a year.
A number of equity analysts are also very bullish on the company, which is determined to break into the market share of global giants such as Johnson Systems.
In a recent report, ICICI Securities said it prefers its parent Mumbai-listed Motherson Sumi Systems above Tata Motors over the next year because it is continuing to win a lot of new orders and diversify its client base.
The group derives 85% of its revenues outside of India, particularly from Europe where it works for Audi (28%), Volkswagen (14%) and BMW (8%).
However, it is also setting up new factories in China and Mexico, which ICICI says are ramping up this quarter and should improve overall ebitda margins.
Revenues increased from $3.74 billion in the financial year to end March 2015 to $4.57 billion in the year to March 2016. By 2020, SMRPBV is targeting $20 billion.
Credit Suisse believes these may be impacted by potential headwinds affecting the global car industry, which is showing signs of sales peaking in both Europe and North America.
S&P said debt to Ebitda stood at 2.78 times at the end of March compared to 2.37 times one year ago, while free funds from operations to debt is at 24.17% compared to 28.29% a year ago.
Joint global co-ordinators for the bond deal were ANZ, DBS, Deutsche Bank and HSBC with Barclays and Standard Chartered as joint bookrunners.
