Generic drug manufacturer Glenmark Pharmaceuticals executed a debut $200 million bond issue on Monday, taking advantage of rising demand for Indian high-yield deals to price significantly through brokers' fair value estimates.
The BB/BB rated deal represents the third Indian high-yield offering in the space of two months, following a $300 million issue for BB rated auto parts manufacturer Samvardhana Motherson Auto in mid-June and a $300 million issue for Ba3/BB-/BB- rated Hexaware in early July.
Each transaction has generated a higher peak order book than the last, with Motherson achieving $1.4 billion in demand, Hexaware $1.9 billion and Glenmark $2.3 billion. However, pricing has also got successively more aggressive, with Motherson tightening the indicative range by 35bp, Hexaware by 50bp and now Glenmark by 50bp.
Syndicate bankers described Glenmark’s pricing as a great result for the issuer but said they were still comfortable with the final level of demand after the final order book dropped off to $1.7 billion when pricing was revised.
The five non-call three deal had initially been marketed around the 5% level before being priced at par on a coupon of 4.5%.
A total of 134 accounts participated with 69% of the deal distributed to Asia and 31% to Europe. By investor type, fund managers took 64%, private banks 24%, banks 8% and others 4%.
A number of non-syndicate brokers benchmarked the deal against a recent $400 million issue by Chinese infant milk formula producer Biostime, which has a one notch lower Ba3/BB- rating.
The group's June 2021 deal, callable one year earlier than Glenmark in 2018, is currently trading on a mid yield-to-maturity around the 5.8% level and mid-price of 105%, up five points from its par issue price in early June.
One non-syndicate broker concluded that fair value lay slightly inside Biostime, while a second pitched it around the 5.5% level and a third at 4.75%.
Glenmark’s pricing is not only another 25bp inside the tighter level of the three but also inside the secondary trading level of one notch higher rated Motherson Sumi. The latter’s 4.875% December 2021 bond further ranks as senior secured debt, while Glenmark is senior unsecured.
Strong secondary performance
At Monday’s close, Motherson Sumi’s bond was being quoted on a mid price around the 101.25% level, equating to a yield-to-maturity of 4.6%. It is up 1.25 points since issue in mid-June.
Both Motherson Sumi and Hexaware have traded well since launch, with the latter rising almost three points in price terms.
The trading momentum and Glenmark’s strong backing from Temasek and IFC were further factors encouraging management to believe they could achieve aggressive pricing and positive secondary market trading. The Singaporean sovereign wealth fund paid $150 million for a 3.83% stake in 2015, while IFC invested roughly $70 million in a $170 million convertible issued by the company last month.
Syndicate bankers cited Motherson and UK pharmaceuticals company Hikma Pharmaceuticals as the two main comparables they benchmarked pricing against. Hikma has a 4.25% April 2020 deal trading around the 3.77% level.
However, it is a significantly more profitable company than Glenmark and has much better credit metrics. In the most recent financial year, it reported Ebitda of $471 million compared to Glenmark’s $217.4 million, resulting in an Ebitda margin of 32.7% against Glenmark’s 19.1%.
Declining leverage
Hikma’s debt to Ebitda also stands at 0.4 times compared to Glenmark’s 2.9 times, according to S&P. One factor standing in Glenmark’s favour is its credit momentum.
The group’s BB rating is on positive outlook with Fitch and some brokers believe S&P is also likely to move it from stable to positive outlook.
In its ratings assessment the US agency said the ratings trigger would be a debt to Ebitda level “sustainably” below 1.75 times. It believes the group will be able to bring its leverage down below two times over the next 12 to 18 months due to the free cash flow generated by its new anti-cholesterol drug Zetia.
The group has six months' exclusivity at the beginning of 2017 after Merck’s patent exclusivity expires. S&P expects the drug to generate revenues of about $170 million to $180 million over the 2017/18 fiscal year. In the financial year to March 2016, Glenmark generated overall revenues of $1.13 billion.
The Bombay Stock Exchange listed group is 47% owned by its promoters, the Saldana family. Just over one third of its revenues are derived from the US, where it sells 112 generic drugs with a further 60 applications pending.
A further 35% of revenues are derived from India where it ranks second in dermatology drugs sales, sixth for respiratory drugs and eighth for cardiovascular drugs.
Like many India pharma companies, it is planning to move away from generics to proprietary drugs and during a recent management roadshow said it hoped to generate 30% of its revenues from its own drugs by 2025.
Joint global co-ordinators for the bond deal were: Citi and HSBC with ANZ, Barclays and DBS as joint lead managers.
