Equities resurgent as CBs slumber

IFR India Report 2009
10 min read
Emerging Markets

Indian ECM has a spring in its step in 2009 after a sombre 2008. Since the May 2009 election results declared the Congress Party and allies clear winners, an avalanche of qualified institutional placements have hit the market, particularly in the real estate and infrastructure sectors.

The Bombay Sensex has skyrocketed almost 51% this year, making it one of the world’s best performing markets. While the market hit a slight wobble on July 6, declining 5.8%, the day the Indian budget was released, equity deals have poured out of India and every issuer and banker is looking to make hay while the sun shines.

According to Thomson Reuters’ data, US$8.8bn in equity issuance has been raised so far this year with most of it printing in the past three months.

“A phenomenal amount of capital has been raised through GDRs and QIPs since the market opened up three months back. A lot of that money has gone towards de-leveraging, including much of the real estate paper that was raised,” said Ravi Kapoor, head of capital markets origination at Citigroup.

“Investors are becoming discerning but are still willing to provide capital at the right price. There will be pockets and windows of opportunity. A lot of IPOs are getting lined up and there are a lot of unexecuted QIPs out there. The government is likely to embark on more aggressive disinvestment in second half of the financial year and that will drive issuance,” he said.

Although most of the money raised so far has been through QIPs, there are signs that issuers are now shifting towards the IPO markets, which reopened with Adani Power’s Rs30.2bn (US$625.8m) IPO. The deal, which closed on July 31, was the first major IPO since Reliance Power’s IPO in 2008. Although the stock made a rather lacklustre debut on August 20, the deal provided momentum to the markets and on the back of that, National Hydroelectric Power Corp’s (NHPC) US$1.25bn float saw strong demand.

NHPC was the first government divestment to hit the market in a long time and was a resounding success. When books closed on August 12, the deal was 23.5 times oversubscribed with the institutional book covered 30 times and the high-net-worth individual portion 57 times subscribed.

NHPC’s success augurs well for the growing pipeline of state-run companies looking to tap the market, including Oil India’s US$500m–$600m float, set to launch in September. However, there are indications that the government is getting choosier about valuations following Adani Power’s IPO success. Generally speaking, however, government divestments are expected to be sensibly priced and well-received by investors.

“There is appetite for reasonably priced Indian paper, especially the likes of NHPC because overall the direction of the market is positive, with growth in the economy, as demonstrated by corporate earnings in Q1. There is a fair bit of investor bias towards India among various economies given the positive momentum in the economy,” said Dilip Kadambi, head of ECM at RBS, India.

Although, the finance minister released few details on government divestments during the budget, there has been growing noise about state-run companies like NMDC, Rural Electrification Corp and Power Grid looking to tap the market, though the exact format – whether through a follow-on public offer or QIP has not yet been determined. The finance minister has proposed increasing the amount of state-owned companies that can be listed to 25%.

Looking forward, equity issuance is likely to be driven by a mixture of QIPs and IPOs. Given the volatile market conditions, several QIPs have been held back due to floor price issues.

“At every upward rally in the market, we will see a lot of QIPs that have been held up by floor prices, coming to the market to do trades. You will continue to see sensible IPOs getting priced and government divestments kicking off,” said Kadambi.

Among the QIPs in the pipeline are deals for JSW Steel, Cipla, Tech Mahindra, and Axis Bank’s GDR-cum-QIP combo. Meanwhile, several power and real estate companies are lining up investment banks for their IPOs – including Indiabulls Power, JSW Energy, Sahara Prime City (north of US$500m), Lodha Developers (US$500m) and Emaar MFG, which pulled its earlier US$1.6bn IPO in 2008.

Given the importance of agriculture to India’s economy, upcoming economic growth numbers will depend on the monsoons, which the market will be closely watching.

“There seems to be a revival in industrial growth but there are some overlaying concerns such as drought and what kind of impact it will have on next quarter’s corporate earnings. This may have an impact on rural spending and rural demand. People are waiting and watching but there may be a lag for a quarter or two,” Kadambi said.

The focus on recapitalisation by issuing straight equity meant that the interest among issuers to look at equity-linked products dwindled in 2009. The offshore equity-linked markets have hardly seen an Indian CB this year with the exception of Vedanta’s US$1.25bn seven-year CB in June, which was priced aggressively and traded poorly in secondary.

Most of the activity during the year in offshore equity-linked markets by Indian issuers was focused on restructuring debt by buying back old CBs privately, initially, then via the public tender offer route.

Jubilant Organosys was the first to set the ball rolling to launch a public tender offer in February for its outstanding CBs and it managed to buy back US$45.3m of its US$189m outstanding May 2011 CBs and US$3m of its US$53m May 2010 CBs. The company bought back the 2011s at 82 cents to the dollar and the 2010s at 85. Jubilant bonds were trading at 70–72 in secondary during the tender offer. JP Morgan acted as dealer manager for the tender offer.

Bankers said the public offer was successful because the company had previously managed to buy US$11m in outstanding CBs through private buybacks over two months, while through the offer it secured US$48m or 20% of its outstanding bonds in a couple of weeks. The public tender offer route made sense then because, at the time of the Jubilant tender, Indian issuers all put together had privately bought back just US$65m worth bonds in the past few months.

With primary deal supply minimal, investment banks liked doing these deals. Banks are said to have earned brokerage fees of 1% from bondholders and another 1% from the issuer.

There was also an interesting restructuring during the period. Suzlon Energy completed a two-stage complex restructuring process of two series of bonds. The first stage was a buyback handled by JPM and Macquarie, which offered bondholders a complicated range of options spanning a straight buyback, an exchange offer or a combo of these options. But one set – June 2012 bondholders – agreed to the buyback, while another – October 2012 bondholders – did not.

In round one, Suzlon bought back US$88.7m of the June 2012 bonds and US$78.6m of the October 2012 bonds, and cancelled them. At that point, US$211.3m of June 2012 bonds and US$121.4m of October 2012s were outstanding. Come June, the company decided it had had enough. It subsequently hired Deutsche Bank – which had bought US$200m of the June 2012 bonds – and retained Macquarie, likely due to its lending relationship with the company.

Deutsche and Macquarie subsequently proposed a simpler buyback where investors were given three options: consent to a covenant waiver for a fee, give consent for no fee or just say no to the amendments. Before these options were made known, the banks involved went to the US, met the bondholders and got them well over the wall.

Subsequently, Suzlon issued US$90m five-year zero-coupon CBs. The new bonds were part of a consent solicitation agreement entered with holders of Suzlon’s October 2012 bonds in return for releasing the company from financial covenants. The issue price was fixed at 104.3% after being shown in the 104%–105% range and the bonds paid a back-end yield of 5.967%. The redemption price was 134.198%. The initial conversion price was fixed at Rs90.38 or the 10-day VWAP to launch date which was July 21.

Since the Suzlon deal, the offshore CB market for Indian issuers has been quiet and the buyback fever died as tender offers hit the market. Secondary activity in CBs also picked up with investors buying bonds in anticipation of selling them back to the company at a profit. As bond prices traded up to their redemption value and equity markets improved, investors came to the view that it made sense to hold their securities.

But with better market sentiment, bankers are hopeful primary issuance interest would increase in coming months.

“Year-to-date issuer interest towards CBs has been low but with stock markets coming back and credit spreads moving in, the prospects for primary issuance is brightening,” a banker said. “In the next couple of months you should see a few deals, but they might not be priced as aggressively as they were during the height of CB issuance by Indian issuers, so if expectations are kept realistic, deals will happen sooner rather than later.”

Denise Wee, Shankar Ramakrishnan