Indian metals and mining company Vedanta Resources completed an upsized debut international bond deal in New York last Friday, raising $500 million from a five-year offering via Barclays and Deutsche Bank. Pricing of the deal was aggressive and shows just how well the Asian high yield sector has performed since the summer when investor resistance to all forms of non-investment grade from the region was at its highest.
Backed by a Ba2/BB issuer rating, the deal was upsized from $300 million and priced at 99.739% on a coupon of 6.625% to yield 6.68%. This represents a spread of 316.5bp over Treasuries or 275bp over mid-swaps. Fees were 45bp and ABN AMRO was joint-lead.
From the global metals and mining sector, bankers quote Russia's Norilsk as a good comparable. The Ba2/BB rated company has an August 2009 bond outstanding that was trading on a yield of 7.35% or 330bp over Libor at the time of pricing.
Likewise from the Asian high yield sector, there have been deals from Ba1/BB+ rated Panva Gas and Ba2/BB- rated Sino Forest since the summer. Both deals have tightened significantly over the past few months as the sector re-gains momentum.
Panva Gas, for example, priced its seven-year bond at par on a coupon of 8.25% in mid-September. Yesterday (December 13), the deal was trading over 100bp tighter at 7.15% or 300bp over Libor.
Sino Forest, which had an uphill struggle when it bought its deal to market in August, has tightened even more dramatically. Having priced a seven-year deal at par on a coupon of 9.125%, the company has seen it trade in nearly 180bp since then. Yesterday it was being quoted on a yield of 7.35% or 320bp over Libor.
Vedanta has been consequently been able to take advantage of market momentum and despite pricing that appears aggressive against these comparables, it generated a large order book of $1.8 billion, with demand from 156 accounts.
Distribution statistics show that European investors took 45%, US investors 33% and Asian investors 22%. By investor type, the book had a split of funds 62%, banks 21%, insurance and pension funds 10% and private banking 7%. The high European component can be partly explained by Vedanta's London listing, which gave investors added comfort.
High overall demand can also be explained by the deal's rarity value. For while there have been a string of deals from the Subcontinent this year, they have all come from the banking sector and had one investment grade rating from Moody's.
Because of its two non-investment grade ratings, lack of government ownership and pure corporate status, Vedanta has offered more of a yield kicker than the Indian banks, which are all trading at very tight levels. ICICI's five-year bond due August 2009, for example, is currently yielding 4.07% or 127bp over Treasuries and 98bp over Libor.
Bankers say the deal is the largest corporate high yield deal from Asia since APP subsidiary Pindo Deli raised $750 million in September 1997. It has also achieved the lowest coupon by a non-investment grade corporate so far this year.
The deal has a Ba2/BB rating because debt has been raised at the holding company and is structurally subordinate to debt at its operating subsidiaries - principally Sterlite Industries. As of March 2004, the group reported consolidated gross debt of $819 million, of which $490 million was secured debt.
Proceeds from the bond issue are being used to fund the company's $2 billion capex plan, of which it is now about one third of the way through. As EBITDA comes on stream to pay down this debt, some believe the company may get upgraded to the Baa3 issuer rating of the parent.
Vedanta's subsidiaries - Sterlite and Madras Aluminium - produce Zinc, (75% domestic market share), copper (42% market share) and aluminium.
In its ratings release Moody's said its stable outlook was based on its expectation that Vedanta's, "Credit measures will decline over the next 18-24 months as additional debt is raised for its capex programme, but that they will rebound from FYE2007 and beyond, mainly due to the additional alumina, aluminum, and zinc production levels anticipated to come progressively on stream over the next 2-3 years."
The agency said that Vedanta has moderate financial leverage compared to other metal and mining peers. It said it expects its retained cash flow (RCF)/Debt ratio to decline to around 20% in FY2006 reflecting the agency's assumptions about base metal prices and the additional debt required to fund capex.
It concluded that, "Upward rating movement may evolve over time if Vedanta 1) succeeds in managing and implementing its expansion projects within specified budgets and timeframes, and 2) maintains EBITDA margin above 20-30%, and Retained Cash Flow/Debt above 40%-45%."
However, it also said that, "the ratings may experience downward trends if Vedanta 1) faces major disappointments in project development/construction, 2) undertakes large debt-funded acquisitions and/or capital management initiatives, and 3) experiences sustained deterioration in EBITDA margins below 20-30% and Retained Cash Flow/Debt below 15%-20%."
