India
Foreign investors still appear to have an appetite for Indian foreign currency convertible bonds. Several Indian FCCBs issued early this year are trading at a discount in the secondary market. A $100 million convertible bond offering by Indian pharmaceutical company Wockhardt received a healthy response from European and offshore US hedge fund investors in mid-September. Around the same time, another Indian company, Sterling Biotech, sold $70 million of convertibles and four others – Sun Pharmaceuticals, Larsen & Toubro, United Phosporous and Orchid Chemicals – could come to market later this year.
The five-year Wockhardt bonds were priced with a coupon/yield to maturity of 5.25% and a conversion premium of around 50% to the company's share price in the local market. The company exercised the $10 million greenshoe option and the bonds will be listed in Hong Kong.
One of the largest Indian exporters of generic bulk drugs, Wockhardt plans to use the cash to acquire companies in Europe, its largest market. In May this year it acquired German company Esparma for $11 million, the company's third foreign acquisition after UK-based CP Pharmaceuticals last year and Wallis Laboratory in 1998.
Record issuance
Last year's spectacular rise in Indian equity prices, the Indian government's decision to ease restrictions on foreign currency borrowing by Indian companies in January and a Moody's upgrade to investment grade for Indian foreign currency debt has led to record issuance of convertibles by Indian companies. They have raised $1.56 billion so far this year.
Indian Hotels, a Tata group company, kicked off a $150 million convertible in February and was followed by several blue chips such as Reliance Energy ($178 million), Associated Cement ($60 million), Bharti Televentures ($115 million), Tata Motors ($400 million), Zee Telefilms ($100 million), Ashok Leyland ($100 million), Mahindra & Mahindra ($100 million) and Tata Telservices ($125 million).
That run was cut short by the shock result of the national election followed by a market collapse on May 17. Poor investor response led companies such as Sun Pharmaceuticals and Orchid to put off plans to issue convertibles.
But equity prices have rallied once again since July. Bankers say it is also no surprise that the present issuers are from fast-growing sectors such as pharmaceuticals. The Wockardt share price has risen 38% in the past year, and helped justify the 50% conversion premium bond investors agreed to pay for the convertible, says Probir Rao of JPMorgan, the sole book-runner to the Wockhardt issue.
“There is a limited window for good credit and good equity stories from India. Investors appear to want the downside protected and are seeking tighter pricing on the credit,” says Ravi Kapoor, head of equity at
DSP Merrill Lynch, a bookrunner to the Indian Hotels and Tata Motors issues this year.
Falguni Nayar, head of institutional equity at Kotak Bank, a Goldman Sachs affiliate and a bookrunner to the Mahindra & Mahindra convertible offering, says: “It is all about pricing and getting the timing right. Current offerings are being priced at a higher yield, and at a high conversion premium. Companies are willing to offer a relatively high YTM [yield to maturity] of around 5% on a five-year convertible for an aggressive conversion premium on their convertibles and given where global interest rates are today, investors are ready to take around 12% downside risk with an opportunity to participate in the upside.”
Demand for quality
JPMorgan's Rao says: “Money is coming back into India, and even though credit spreads have tightened, there is a demand for quality stocks from India.”
Some bankers say there could be more medium-size Indian companies issuing convertibles in contrast to the large companies that sold them early this year. “The current rally in the equity market has witnessed a sharp run-up in the prices of mid-cap stocks, and Indian pharmaceutical companies have led the charge.
This makes convertibles an attractive proposition for the ambitious ones,” says Asit Bhatia, head of corporate banking at Bank of America. The National Stock Exchange's S&P CNX Nifty index has risen by around a fifth since May and its CNX Midcap 200 index has risen by more than 35%.
Size is not all that important but future issuers will have to be companies that have a strong growth story, say Kotak's Nayar and DSP's Kapoor. “Investors are bullish on sectors such as pharmaceuticals where the growth is visible and is not cyclical as in some other sectors,” says Nayar, adding that the market could see offerings from the auto components and capital goods sectors too. Leading the way also are hedge fund investors that are betting that Asia, and India in particular, will continue to grow despite worries over high international oil prices.