JPMorgan designs bond for Agarwal to amass $2.4 billion Anglo stake
MUMBAI: London-based billionaire Anil Agarwal’s family holding company Volcan Investments launched a £2 billion ($2.4 billion) mandatory exchangeable (convertible) bond issue on Thursday to fund its planned acquisition of about 13% in commodities giant Anglo American, rival to his Vedanta Resources. Funding an acquisition through bonds rather than cash is unusual, bankers said.
In a coup of sorts, JPMorgan Chase & Co is sole book runner and underwriter to the transaction and will be raising the resources on behalf of the Agarwal family office.
The bonds will be exchanged either for cash or for Anglo American shares in 2020. The fund-raising is expected to get completed by next week, multiple sources close to the process told ET.
The three-year instrument is being offered with annual coupon payments of about 3.75-4.2% and Volcan will pledge Anglo American shares that it accumulates as a security to the transaction. In addition, Anil Agarwal’s flagship London-listed entity Vedanta Resources will pledge nearly one third of the promoter holding as an additional security to bond buyers, sources said.
While JPMorgan is a kind of guarantor for the investors, the Anglo shares are the underlying assets, explained a domestic debt market expert, who is not authorised to talk to the media. JPMorgan has entered into a private agreement with Agarwal whereby he has pledged a portion of his shares in Vedanta.
The unique structure is being planned as buying such a large chunk of Anglo shares would be time-consuming and the price would rise significantly over that period.
This instrument on the other hand has been conceived on the back of expectations that buyers of the convertible bonds will sell their Anglo shares short to hedge exposure. That in turn will help Agarwal build up his stake.
“Agarwal is not using cash to acquire Anglo shares. That means, he is not risking himself to buy shares,” said Rakesh Arora, managing director of Go India Advisors. “Though he won’t get any board seat at the moment, the deal would give him firepower to influence board decisions, including strategic sale of assets of Anglo.”
A banker who praised the move, said companies don’t use the avenue very often.
“By doing this, the promoter is selling equity forwards or buying an option to acquire the shares. And, he has got a three-year window, which is a pretty long time in the commodity space,” the person said.
Under the structure, bond investors will be bankrolling the acquisition, said Chirag Shah, senior vice-president, Phillip Capital. “Right now, they would be earning high interest rate but if the issuer (Volcan) fails to repay, they will end up part owning Anglo American shares.”
INVESTOR INTEREST
An investment banker at a large domestic private bank said: “High-yield investors show interest on such papers.
Investors of these instruments are not purely debt investors but institutions with investment mandate for both debt and equity. By floating such a product, the promoter is selling equities forwards as the investors may be converting into equities.
Agarwal made a surprise bid for up to 13% of British mining giant Anglo American Plc for $2.4 billion, a move that will give him a foot in the door of the $23-billion conglomerate, which is larger than his Vedanta Resources. It also gives him a piece of De Beers, the diamond powerhouse owned by Anglo American. The move comes after a failed merger proposal between Vedanta and Anglo American last year.
Globally mandatory convertible bonds have an outstanding issuance of $22,965 million ($22.97 billion), show data from Bloomberg. During this calendar year, issuers have collectively sold about $2,702 million ($2.70 billion) worth of such instruments.
The instrument is a type of convertible bond that has a required conversion or redemption feature at a given date. Either on or before a contractual conversion date, the holder must convert it into the underlying common stock. These securities provide investors with higher yields to compensate holders for the mandatory conversion structure, according to Investopedia.
In a coup of sorts, JPMorgan Chase & Co is sole book runner and underwriter to the transaction and will be raising the resources on behalf of the Agarwal family office.
The bonds will be exchanged either for cash or for Anglo American shares in 2020. The fund-raising is expected to get completed by next week, multiple sources close to the process told ET.
The three-year instrument is being offered with annual coupon payments of about 3.75-4.2% and Volcan will pledge Anglo American shares that it accumulates as a security to the transaction. In addition, Anil Agarwal’s flagship London-listed entity Vedanta Resources will pledge nearly one third of the promoter holding as an additional security to bond buyers, sources said.
While JPMorgan is a kind of guarantor for the investors, the Anglo shares are the underlying assets, explained a domestic debt market expert, who is not authorised to talk to the media. JPMorgan has entered into a private agreement with Agarwal whereby he has pledged a portion of his shares in Vedanta.
The unique structure is being planned as buying such a large chunk of Anglo shares would be time-consuming and the price would rise significantly over that period.
This instrument on the other hand has been conceived on the back of expectations that buyers of the convertible bonds will sell their Anglo shares short to hedge exposure. That in turn will help Agarwal build up his stake.
“Agarwal is not using cash to acquire Anglo shares. That means, he is not risking himself to buy shares,” said Rakesh Arora, managing director of Go India Advisors. “Though he won’t get any board seat at the moment, the deal would give him firepower to influence board decisions, including strategic sale of assets of Anglo.”
A banker who praised the move, said companies don’t use the avenue very often.
“By doing this, the promoter is selling equity forwards or buying an option to acquire the shares. And, he has got a three-year window, which is a pretty long time in the commodity space,” the person said.
Under the structure, bond investors will be bankrolling the acquisition, said Chirag Shah, senior vice-president, Phillip Capital. “Right now, they would be earning high interest rate but if the issuer (Volcan) fails to repay, they will end up part owning Anglo American shares.”
INVESTOR INTEREST
An investment banker at a large domestic private bank said: “High-yield investors show interest on such papers.
Investors of these instruments are not purely debt investors but institutions with investment mandate for both debt and equity. By floating such a product, the promoter is selling equities forwards as the investors may be converting into equities.
Agarwal made a surprise bid for up to 13% of British mining giant Anglo American Plc for $2.4 billion, a move that will give him a foot in the door of the $23-billion conglomerate, which is larger than his Vedanta Resources. It also gives him a piece of De Beers, the diamond powerhouse owned by Anglo American. The move comes after a failed merger proposal between Vedanta and Anglo American last year.
Globally mandatory convertible bonds have an outstanding issuance of $22,965 million ($22.97 billion), show data from Bloomberg. During this calendar year, issuers have collectively sold about $2,702 million ($2.70 billion) worth of such instruments.
The instrument is a type of convertible bond that has a required conversion or redemption feature at a given date. Either on or before a contractual conversion date, the holder must convert it into the underlying common stock. These securities provide investors with higher yields to compensate holders for the mandatory conversion structure, according to Investopedia.
