Welspun Corp, an Indian manufacturer of steel pipes for the transportation of oil and gas, on Wednesday launched a tender offer for its $150 million convertible bond that matures in 2014 and which is currently trading at about 80% to 82% of its principal value.
The offer is structured as a reverse bookbuild, which means that bondholders can submit a bid with the number of bonds they would like to tender and at what price. After reviewing the bids the company will decide on a final price where it will buy and all bonds tendered at or below that price will be bought back. Bondholders whose bids are accepted will all receive the same final price. The company could also decide not to accept any of the bids, if it doesn’t like the price.
The company, which was previously known as Welspun-Gujarat Stahl Rohren, hasn’t set a range in which it will be accepting bids, but as per Indian regulations a buy-back has to be done at a discount of at least 8% to the accreted price, which means the maximum tender price is 92.
This could give bondholders a premium of about up to 15% versus the market price before the tender. It remains to be seen if this is enough or if the investors want to keep hold of the bonds for another three years to get their principal back when the bonds mature in September 2014. The CB pays an annual coupon of 4.5%. It also comes with a small additional back-ended yield for a total yield-to-maturity of 5%.
At the moment at least, the possibility of converting the bonds into equity seems quite remote. The share price has fallen 31% from a high of Rp116.229 in October last year and is down 70% since the CB was issued in September 2009 (the deal was launched a couple of days after the stock hit a 52-week high). This has turned Welspun from an $800 million market cap company into a $300 million market cap company with about $1 billion of debt, including the CB.
The conversion premium at launch was quite low at 12.76% and resulted in a conversion price of Rp300. However, based on Wednesday’s close of Rp79.51, that gap has widened to 277%.
A source estimated that the bonds may be held by about 30 to 40 investors, comprising a mix of private banking clients, outrights, hedge funds and some credit investors.
The company hasn’t indicated how much of the bond issue it intends to buy back, and the final amount will no doubt depend on the price that it can achieve. The source said the company has no intention of buying back the entire CB, but if it can use the current nervousness in the market to buy back and cancel some bonds at a low price it will do so as it will reduce its redemption costs later.
At the same time, the tender will give bondholders who may be in some distress or in the need of raising cash an opportunity to sell their CBs slightly above the current market price. Most Indian CBs are trading well below par after a tough year for the local stock market and investors who have bought a lot of CBs in the past few years may be sitting on significant losses.
In the offer document, Welspun noted that the tender will be funded from existing cash holdings and potentially fresh commercial borrowings.
The tender remains open until midnight tonight (Hong Kong time). The results will be announced on December 15.
The tender is managed by J.P. Morgan, which was also the sole bookrunner when the five-year CB was originally issued.
