Report

An Innovative Funding Exercise raises US$ 100 Million for Ashok Leyland
Enthusiastic subscription reflects investor confidence
ON THE NIGHT of April 22, 2004, when the bears and the bulls of the Indian Stock market were fast asleep, Ashok Leyland had earned in credit, a whopping US$ 100 million through the issue of Foreign Currency Convertible Notes (or Bonds) - an emerging, successful trend in long-term funding. 0.5% p.a. and will be redeemable at par at the end of five years, if not converted into Equity Shares or GDSs during this period. The yield to maturity on the bonds works out to 0.5% p.a. To get all the footnotes on the Notes, as also to understand the feverish excitement the Traditionally, the market is divided between equity investors (who are willing to take risks) and fixed income investors. The third hybrid variety of debt with a flavour of equity was becoming the market-preferred choice by mid2003. The proposal to raise a bond was arrived at after witnessing the phenomenal growth in convertibles as a preferred choice of investors, particularly in the South-East Asian markets. As soon as we realized this, we started gathering market intelligence on reactions to these issues.

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The next day, the Company announced to the world that the issue was oversubscribed approximately five times, and was priced within a few hours of the offer opening in Singapore/ Hong Kong. The salient features: the bonds are convertible into either equity shares or Global Depository Shares (GDS) of the Company, at the option of the bond holders, at a conversion price of Rs.335 per share, which reflects a 21.6% premium to the closing price of Rs.275.50 on April 22. The bonds carry a coupon rate of
Ashley News / June 2004

FCCB team at Corporate Finance was (and is still) going through, we turned to K Sridharan, ED-Finance, for an initiation. For some time now, we have been scanning the market for long-term funding options. The common routes are to go in for an equity or GDR issue (that are affected by share market fluctuations) or go in for a straight Indian Rupee debt or even External Commercial Borrowings (ECB), both of which come with a 5-6% interest tag.

For a few months thereafter, the market started satiating because the companies that were coming in were chiefly software companies from Taiwan. The market started developing a hunger for non-tech, nonTaiwanese, brick and mortar, old economy stocks. It was also the ideal time: (1) the Indian economy story was going great guns (2) the CV industry was upbeat (3) the US treasury yields which are the benchmark for these

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securities and considered a safe haven by investors were at the lowest levels (4) the Ashok Leyland market cap of stock was strong.

Heres how
Once the proposal was mooted and the EGM approved it on February 28, a procedure of due diligence was gone through on March 23, with the help of bankers and lawyers and an offering document prepared. Post-audit, with inputs from investment bankers, the structure was agreed upon and then once again it was time to watch the market. April 22: Information - and a fair dose of intuition finally decide the date of issue. For all the weeks of preparation, the climax is all but a few hours, with investors sitting in simultaneously in Singapore, Hong Kong and London. After the Indian stock market

maturity (as bid by the investors) and around 9.00 pm in Singapore, the books are transferred to London, where between 2.00 pm and 5.00 pm (London time) the issue is oversubscribed. The investment bankers help the management take a decision on the range of pricing, the prime consideration being a low coupon rate. LRLIH Ltd., U.K., the principal shareholder of the Company, had committed to subscribe for an aggregate principal amount of US$50.93 million, even before the final terms of the bonds were known. Once the bonds were offered, LRLIH made an application for the said amount and were allotted bonds on the same terms and conditions, as applicable to other allottees. The issue closed after being oversubscribed approximately five times and by 10.00 pm in India, the final allocation done. The overnight timing was crucial because the pricing of the bond was not affected by the share market fluctuations. April 23: Before the Indian stock market opened, Ashok Leyland had completed the pricing of the FCCBs at attractive rates. A reiteration of the enormous trust reposed by the investing fraternity on the Companys future.

Sowhere would the money go?

The Company intends to use the aggregate net proceeds of the offering for capital expenditure for capacity addition, technological improvements and additions to other facilities.

Advantage FCCB
The uniqueness of this issue is that it offers assured returns (unlike GDRs), both when the investor decides to convert the bonds into shares or decides to continue holding the bonds.

Additional Powers
The bond market has its own set of mandatory guidelines that include, among others a provision to call the bonds, whereby, the investors are asked to convert the bonds into shares right away. (This is done when the share price is say, 20% above the quoted price of Rs 335 in the bond.) The objective is to ensure that there is no outflow, on account of redemption of bonds. However, the first two years are a hard No Call period. Another option is to reset the conversion price up to 80% of the share price. That is, the conversion can be made to happen when the share price is in the Rs 268 Rs 335 band, any time after two years, if Ashok Leyland so desires.

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What next?
The raised millions cannot be brought into the country all at once. Instead, the money has to be brought in gradually, in parts, as per RBI guidelines based on plans of actual capital expenditure. The bond exercising part, as it is called, calls for phenomenal Forex operations, that park the funds in overseas banks as short-term deposits, to maximize returns. Currently, the US$100 million cozily resides in three currency baskets - as Dollars, Pounds and Euros, earning returns at 1.03%, 4% and 2.5% interest rates, apart from the huge risk-rewards from currency appreciation i.e., suppose the pound strengthens significantly from the day we invest to the day we withdraw, so much is the profit we gain from the so-called locked-in money. Unfortunately, the other side of the coin is also true. Therefore, this crucial phase involves dynamically monitoring the deposits, vis-a-vis currency movement and taking appropriate decisions on options/derivatives to protect the principal.

Bonding Spirit
Working on the first ever such exercise by the Company was a learning experience for the cross-functional FCCB team members drawn from Corporate Finance and Secretarial, with N Sundararajan, Company Secretary & HeadInternal Audit and Ms Mohana Srinivasan, DGMCorp Treasury, playing significant roles. From liasing with overseas counterparts all through the initial period to the real-time excitement of those final hours of offering, it called for a total devotion of time (according to Singapore, London timelines) and an enthusiastic team spirit to keep the show going Welldont we now see a hundred million dollars smiling?

closes around 3.00 pm, the top management takes the call based on the closing price of the Ashok Leyland stock and decides to plunge. The investment bankers analyse the market and come back with the range for: yield to maturity (interest) and conversion premium the two major determinants in an FCCB. After the terms are accepted, the bankers are authorised to fix the range (also called price discovery or book building mechanism). The markets then fill up at different yields to

Ashley News / June 2004