Three Indian CB's in one week has been followed by three in one day and an abrupt change in sentiment towards the Indian convertible sector. Transactions launched yesterday (Thursday) for Tata Teleservices (TTSL), Mahindra & Mahindra and Jubilant Organosys came up against an investor base where the four key accounts are said to have turned net sellers and the rest have become price sensitive.
With investors aware of a growing deal pipeline, specialists say momentum is fading, valuations are being forced wider and secondary market spreads are coming under pressure. A $100m deal for TTSL particularly tested the market since it not only marks the third convertible from the Tata group this year, but is a true high yield offering from a company that has only just exited the project financing stage of its existence.
With Deutsche Bank as lead manager, the deal was priced towards the wide end of terms and on full conversion will effectively double the company's $150 million freefloat. The deal size was increased slightly from $100 million to $125 million after books are said to have closed six times subscribed and there is also a $25 million shoe on top of this.
The five-year deal was priced at par with a coupon of 1% and redemption price of 119.38% to yield 4.5%. Terms had been marketed on a yield of 4% to 4.5%.
The conversion premium was set at 30% to the stock's rs19.2 close compared to a range of 28% to 38%. Year-to-date the stock is down 15.79%, although it has started to climb back from a low of just below rs15 in mid-March. On a one-year basis, it is up 295.88%.
The deal also incorporates a three-year hard no call option thereafter subject to a 130% hurdle.
Underlying assumptions comprise a bond floor of 85.8%, theoretical value of 104% and implied volatility of 36%. This is based on a credit spread of 350bp over Libor, no dividend, no borrow and 45% volatility assumption.
Specialists argue that the volatility assumption is made difficult by the fact that Tata is a highly volatile stock, but this should be dampened as new equity comes on stream.
The necessity of pricing at a premium can be seen in comparison to the terms Bharti Televentures achieved just over a month ago when it secured a 40% premium, zero coupon and five-year yield-to-maturity of 2.25%.
Because TTSL has little credit history, availability of asset swap was crucial, although most accounts are said to have ultimately wanted to hold the deal on an outright basis.
"It's the Asian accounts, which have fallen away slightly," says one observer. "A lot of the long only money has evaporated and instead the order book was more heavily concentrated towards the traditional balanced CB funds particularly those on the Continent."
A total of 110 investors are said to have participated with a geographical breakdown, which saw roughly 60% placed in Europe, 15% offshore US and 25% Asia.
TTSL currently ranks as India's fifth largest cellular company and the group has ambitious plans to lift its subscriber base from 200,000 to five million within the space of one-year. It is in the process of building a national footprint from one circle around Mumbai to a total of 11.
It also has a policy of maintaining a balanced debt to equity ratio.
Launched and priced later than TTSL was a $100 million convertible for auto manufacturer Mahindra & Mahindra. Under the lead of ABN AMRO and Kotak Mahindra, the group priced a five-year deal at par with a zero coupon and redemption price of 117.49% to yield 3.25%. Again this was the outer end of a 2.75% to 3.25% range.
The conversion premium was fixed at 37% over the stock's rs472.3 close compared to a range of 37% to 43%. There is also two-year hard no call, thereafter subject to a 120% hurdle.
Underlying assumptions comprise a bond floor of 85.8%, theoretical value of par and implied volatility of 45%. This is based on a credit spread of 225bp, 2% dividend yield, no borrow and 260 day volatility of 44%.
The nearest comparable is tranche B of Tata Motor's $400 million convertible of last week. This priced at par with a 1% coupon and redemption price of 121.78% to yield 3.75%.
However, while M&M has secured a more aggressive yield structure, Tata had a staggeringly high conversion premium of 60%. Its deal also had a tighter credit spread of 170bp over Libor and far lower bond floor of 72.12%. It is still trading below issue price at 95% bid.
Specialists say M&M's closed covered and had a concentrated number of 40 investors. Like TTSL, about 60% of the deal was placed in Asia, 25% in Europe and the remaining 15% with offshore US accounts.
Over the past year M&M has witnessed a complete turn-around in its fortunes largely thanks to its new car, Scorpio. Net profits to the third quarter ended December 30 were up 184% on the previous year and the stock has correspondingly shot up from a low of rs109 in early 2003 to a high of rs505.9 in mid February 2004.
ABN is also scheduled to price a $50 million convertible for pharmaceutical company Jubilant Organosys. Indicative terms comprise an issue price of par, zero coupon and redemption price of 115.85% to 118.48%.
The five-year deal has an indicative yield-to-maturity of 2.95% to 3.45% and a conversion premium of 21% to 26%. There is also hard no call for three years and thereafter at 130%.
