BNP Paribas was sole bookrunner for the offering, which marked its debut as an arranger of CBs for issuers out of Asia where the bank typically focuses on straight equity and debt. And while the issue did eventually get done, the bankÆs inexperience showed through when it launched the Videocon CB at the end of last week with an initial yield that was in breech of Indian regulations.
Yields on Indian CBs are allowed to be a maximum 350 basis points above the reference rate, which in this case meant no more than 9.12%, while BNP was offering Videocon to investors with a yield of 9.35%.
After realising the mistake, the bonds were withdrawn and slightly restructured to comply with the regulations before being relaunched early this week. The move caused some confusion in the CB market and also prompted industry watchers to question whether the bonds had had to be re-offered below par to compensate investors for the lower yield.
While there was no firm evidence that the latter had been the case, investors who chose to buy into the bonds despite the controversy did have to accept a yield of only 9% after the redemption price was lowered to 127.65% from an initial 130.04%.
Even at the lower rate, though, the yield was still the highest ever on an Indian CB and together with the other terms û which were left unchanged from the initial offer û the overall pricing looked pretty cheap from an investor point of view.
However, given the low-quality credit and the difficult market environment, it ôpretty much had to be cheap,ö one industry specialist says.
The five-year bonds were offered at a base size of $100 million with an option to increase it to $115 million in case of strong demand. There was also a 15% greenshoe, which the bookrunners decided not to allocate. There was no information on the level of demand, but the fact that the size was capped at $105 million suggests it wasnÆt overwhelming. The buyers were said to have been primarily CB specialist accounts.
Aside from the yield, the bonds will also pay an annual coupon of 4.5%. The conversion price was set at Rs511.18, which equaled a 22% premium to last ThursdayÆs closing price of Rs419. Since then though, the share price has slipped 7.6% to yesterdayÆs (July 19) finish at Rs387.25 which has seen the conversion premium push out beyond 30%.
However, the bonds do carry a conversion price resent on each anniversary, which will lower the conversion price in case it hasnÆt yet reached the original level. The reset is subject to a floor price of Rs410. There is an issuer call after three years subject to a 130% hurdle.
The bonds were priced off a credit spread of 450 basis points above US Libor. According to market sources, investors had asked for asset swaps for more than the customary 50% of the deal, with some saying swaps had been provided for as much as 75% or even 85%. The bonds have a full dividend protection and the stock borrow cost was assumed at 5%.
This gave a bond floor of about 96% and an implied volatility in the low 20s, which compares with a 100-day volatility of 49.4%. It is also worth noting that the volatility hasnÆt fallen below 30% in the past 18 months.
One CB specialist noted that to get a 22% premium at a 96% bond floor was pretty attractive, given that only a few months ago that kind of bond floor was typically used to accommodate 50% premiums. However, the market has taken a significant turn since then with the benchmark Sensex index having plunged 21% from its record high of 12,671 points on May 11 to yesterdayÆs close of 10,007 points.
There have also been no Indian CBs above 100 million since Amtek Auto priced a $250 million issue on May 10, and only two smaller ones.
Videocon, which is 71.4% controlled by the Dhoot family, also sold $90 million worth of CBs in February with the help of DBS and Lehman Brothers. That issue was originally planned to be at large as $500 million, but banks questioned the possibility of such a hefty size and several big CB houses were said to have turned their back on the deal.
VideoconÆs main business is the manufacturing of consumer electronics and home appliances. Last year it bought French conglomerate ThomsonÆs colour TV picture tube manufacturing business to become one of the largest players globally in this industry. It also makes CRT glass that is used among other things in TV monitors and has a 25% stake in oil & gas company Ravva.
IndiaÆs Videocon Industries has raised $105 million from its second convertible bond issue this year which will be used to partly to finance oil and gas exploration projects in Oman and Australia, partly to expand its colour picture tubes business.
BNP Paribas was sole bookrunner for the offering, which marked its debut as an arranger of CBs for issuers out of Asia where the bank typically focuses on straight equity and debt. And while the issue did eventually get done, the bankÆs inexperience showed through when it launched the Videocon CB at the end of last week with an initial yield that was in breech of Indian regulations.
Yields on Indian CBs are allowed to be a maximum 350 basis points above the reference rate, which in this case meant no more than 9.12%, while BNP was offering Videocon to investors with a yield of 9.35%. The bank ran the CB from its existing European platforms.
After realising the mistake, the bonds were withdrawn and slightly restructured to comply with the regulations before being relaunched early this week. The move caused some confusion in the CB market and also prompted industry watchers to question whether the bonds had had to be re-offered below par to compensate investors for the lower yield.
While there was no firm evidence that the latter had been the case, investors who chose to buy into the bonds despite the controversy did have to accept a yield of only 9% after the redemption price was lowered to 127.65% from an initial 130.04%.
Even at the lower rate, though, the yield was still the highest ever on an Indian CB and together with the other terms û which were left unchanged from the initial offer û the overall pricing looked pretty cheap from an investor point of view.
However, given the low-quality credit and the difficult market environment, it ôpretty much had to be cheap,ö one industry specialist says.
The five-year bonds were offered at a base size of $100 million with an option to increase it to $115 million in case of strong demand. There was also a 15% greenshoe, which the bookrunners decided not to allocate. There was no information on the level of demand, but the fact that the size was capped at $105 million suggests it wasnÆt overwhelming. The buyers were said to have been primarily CB specialist accounts.
Aside from the yield, the bonds will also pay an annual coupon of 4.5%. The conversion price was set at Rp511.18, which equaled a 22% premium to last ThursdayÆs closing price of Rp419. Since then though, the share price has slipped 7.6% to yesterdayÆs (July 19) finish at Rp387.25 which has seen the conversion premium push out beyond 30%.
However, the bonds do carry a conversion price resent on each anniversary, which will lower the conversion price in case it hasnÆt yet reached the original level. The reset is subject to a floor price of Rp410. There is an issuer call after three years subject to a 130% hurdle.
The bonds were priced off a credit spread of 450 basis points above US Libor. According to market sources, investors had asked for asset swaps for more than the customary 50% of the deal, with some saying swaps had been provided for as much as 75% or even 85%. The bonds have a full dividend protection and the stock borrow cost was assumed at 5%.
This gave a bond floor of about 96% and an implied volatility in the low 20s, which compares with a 100-day volatility of 49.4%. It is also worth noting that the volatility hasnÆt fallen below 30% in the past 18 months.
One CB specialist noted that to get a 22% premium at a 96% bond floor was pretty attractive, given that only a few months ago that kind of bond floor was typically used to accommodate 50% premiums. However, the market has taken a significant turn since then with the benchmark Sensex index having plunged 21% from its record high of 12,671 points on May 11 to yesterdayÆs close of 10,007 points.
There have also been no Indian CBs above 100 million since Amtek Auto priced a $250 million issue on May 10, and only two smaller ones.
Videocon, which is 71.4% controlled by the Dhoot family, also sold $90 million worth of CBs in February with the help of DBS and Lehman Brothers. That issue was originally planned to be at large as $500 million, but banks questioned the possibility of such a hefty size and several big CB houses were said to have turned their back on the deal.
VideoconÆs main business is the manufacturing of consumer electronics and home appliances. Last year it bought French conglomerate ThomsonÆs colour TV picture tube manufacturing business to become one of the largest players globally in this industry. It also makes CRT glass that is used among other things in TV monitors and has a 25% stake in oil & gas company Ravva.
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