REVIEW: JSW STEEL DEBUT HERALDS MORE INDIAN HY SUPPLY
Thu, 2014-11-06 16:47 by Lianting Tu
SINGAPORE, Nov 6 (IFR) – JSW Steel’s debut USD500m 5-year offering yesterday has raised expectations for more high-yield supply from India.
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"Being an inaugural credit, JSW should benefit in the future by diversifying its investor base and, at the same time, it gives investors the opportunity to invest in new credits coming out from India", said Amit Sheopuri, co-head of Asia DCM at Citi, left lead for the JSW trade. Sheopuri expects more Indian issuers take advantage of the foreign currency route given the Issuer's need to diversify and the benefits of refinancing the high-cost local debt with competitively priced offshore debt.
Investors liked Indian high-yield deals as they are desperate to diversify from Chinese property bonds, said a Singapore-based portfolio manager.
The fact that the issuer is the onshore entity also made investors more comfortable with the structure.
“The structure for JSW Steel is better than Chinese property bonds in terms of onshore-offshore subordination,” the Singapore-based portfolio manager said.
In addition, investors saw value in JSW’s expected ratings of Ba1 (stable) from Moody’s and BB+ (stable) from Fitch, and allowed the steel maker to set lighter covenants than other non-investment grade issuers, according to bankers and analysts.
“There was very good demand out there for JSW Steel because of their superior credit and ratings,” said Sheopuri.
The company, which completed an unusual equity-linked loan in 2012 to refinance its convertible bonds, priced yesterday's Reg S deal at par to yield 4.75%. In order to secure top-tier orders, JSW also decided to price at the higher end of the final guidance of 4.625%-4.750%. The initial guidance was 4.875%.
“The company took a long-term view and took the feedback from tier-one accounts very seriously,” a second banker on the deal said. As a result, 70% of the notes were sold to fund managers.
JSW vs Tata Steel
That said, many analysts still think the bonds priced inside where they see fair value. Some have compared JSW Steel’s bonds to its larger peer Tata Steel, which has a 2020 bond indicated at 4.3%, and to Vedanta’s 2019s, quoted at 5.5%.
Moody’s rates JSW one notch higher than Tata Steel. But analysts generally see Tata Steel as a stronger name due to its much larger scale and better brand name globally.
BNP analysts assigned a 50bp pick-up over Tata Steel’s implied curve, which pointed to a fair value for JSW at 4.8%.
The paper traded slightly below par at 99.875 in secondary today.
Another key factor that differentiates Tata Steel from JSW is JSW doesn’t own any iron ore mines, which makes the company more susceptible to risks of falling steel prices.
In order to address the supply issue, JSW is looking to enhance its vertical integration. “But this may come at the cost of increased financial leverage,” Charles Macgregor, head of research at Lucror Analytics, wrote in a research note.
In terms of credit fundamentals, JSW is better than Tata Steel on margins and leverage. The company’s Ebitda margin has been on an improving trajectory, rising to 17.7% by March from 15% two years prior. This is much higher than Tata Steel’s 10%. Its debt-to-Ebitda leverage was also lower at 3.9x than Tata’s 9x.
Liquidity, however, has been tight for JSW. It had cash and cash equivalents of INR7bn at the end of March, far from sufficient to cover short-term debt of INR84.4bn.
Some analysts have also pointed out weak investor protection based on its bond indenture. “It may appear that management interests are skewed towards shareholders rather than bondholders,” according to Macgregor.
Citi, ANZ, Credit Suisse, Deutsche Bank and Standard Chartered led the trade.
Lianting.tu@thomsonreuters.com; Manju.dalal@thomsonreuters.com