The five-year bonds, which were split into two equal-sized tranches, have two unusual features, which together make this a unique deal in the Indian market. Most notably, the conversion price will be fixed only six months from the issue date and there is also a mandatory conversion feature after six months, subject to a 125% hurdle, for Tranche 1 and after 12 months, subject to a 130% hurdle, for Tranche 2.
One observer notes that this deal will have an inverse relationship to the performance a ônormalö CB given that it will reward investors for immediate share price performance above the future market price, but will cap overall returns. Typically, investors in Indian CBs get no reward for the first 40-50% rise in the share price, but once the conversion price has been hit, any further gains are all theirs.
That Panacea was able to use a combination of these two features shows that investors are buying the companyÆs growth story and its bullish share price outlook. Due to the complex structure of the bond it was not widely marketed, but the fact that both tranches were increased to $50 million from an original $35 million, does reflect strong interest from the participating investors.
Tranche 1 was priced with a 4.5% semi-annual coupon and was sold at par. It will also be redeemed at par, giving a yield to maturity of 4.5%. The way the bonds are structured, however, means they are more likely to convert into equity early, assuming the share price continues to rise after the conversion premium has been set.
The Tranche 1 bonds are convertible into common shares either at a 15% discount to the reference price, which will be equal to the average of the daily volume weighted average price for the stock in the fourth, fifth and sixth month after the issue date, or at the floor price, whichever is greater. The floor price has been set at Rp264.74, which equals a 1.98% discount to TuesdayÆs closing price on the National Stock Exchange of India and essentially protects the company from any potential slide in the share price before the conversion price is set.
There is also a conversion price ceiling at Rp675.25, or 250% above TuesdayÆs close, a share price increase that would equal the gains made over the past 18 months.
The second tranche, which was also sold at par, pays no coupon but has a redemption price of 142.8%, which gives it a 7.25% yield to maturity. The greater yield is to compensate investors for the fact that these bonds are convertible at a 10% premium to the reference price (which will be the same as for Tranche 1) or at the floor price, should that be higher. For this tranche the floor price is equal to TuesdayÆs close of Rp270.1, while the price ceiling is the same for both tranches.
By splitting the deal into two tranches, the company has somewhat hedged is bets, with half the deal potentially being converted into equity after six months and the rest after 12 months. As one observer comments, ôThey get two staggered equity injections and assuming the stock price performs as they hope, they will be at a significant premium to todayÆs price.ö
Each investor was allocated bonds from both Tranche 1 and Tranche 2 in equal amounts.
To make sure investors understood the unusual structure of the bond and the companyÆs growth outlook, the management did a two-day road-show to Hong Kong and Singapore where it met with a total of 10 investors. It also did some conference calls with investors based in Europe. The success ratio from those meetings was said to be high, with seven of the 10 investors it had met one-on-one buying into the deal and 15-20 investors in the book overall. Most of the deal was allocated to Asia, although European investors did buy part of it.
Both tranches assume a credit spread of 325bp over Libor, a dividend yield of 0.6% and a stock borrow cost of 5%. This gives a bond floor of 84.4% for Tranche 1, which is unusually low for an Indian CB, but again shows that investors were buying into the deal for the equity story. The implied volatility is 19%, which compares with a 90-day historic volatility of about 38%.
Tranche 2 has a bond floor of 94.1% and an implied volatility of 28%.
Tranche 1 traded about 25bp below par yesterday, according to traders, while Tranche 2 was up 75bp versus the issue price. PanaceaÆs share price gained 0.13% to Rp270.45.
Analysts based in India note that the stock has previously been under-owned due to low earnings visibility and a lack of transparency, but say both of these have improved over the past year, particularly last summer when there was a significant spike in daily trading volumes. However, they add that the stock became somewhat illiquid again last autumn, although the share price continued to climb.
Panacea has a market cap of about $360 million and if both tranches fully convert at the floor price, the new shares will account for about 28% of the share capital. At a higher conversion price, the amount of new shares would be smaller.
The company derives about 65% of its revenues from its vaccine segment and is forecast to double its earnings in the fiscal year to March 2006. This has helped underpin a 95.5% uptick in its share price over the past 12 months. Vaccines against polio and anthrax are among its major products, but Panacea also makes drugs focused on pain management, diabetes and immunosuppressants.
Last month the company reported an 81% increase in net profit in the third quarter (October-December 2005) to Rp51.9 million, which brought its nine-month profit to Rp494.6 million û up 118% from the same period a year earlier. Nine-month turnover rose by 65% to Rp4.10 billion.
ôWe donÆt expect the profit to grow at the same extent next year, but they will still beat the industry average of 18-20% and we could see another 40-50%,ö one analyst comments. He also notes that the companyÆs joint venture with US pharmaceutical giant Chiron Corp is putting it in a strong position to market new products in the Indian market.
Much of the future growth is also expected to come from a planned expansion into emerging markets, including those in South America.
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