Under Pressure, Vale Clinches Convert

Brazilian miner Vale has raised $941.7m through the issuance of 2012 convertible notes. The company launched the deal Monday evening and saw its common shares take a 7.2% plunge yesterday as investors, apparently displeased with the dilution and lack of clarity on use of proceeds, dumped the stock. The Bovespa dropped 2.3% on the day. Negative sentiment appears to have made pricing the jumbo, LatAm’s first convertible since Vale’s last $1.9bn tap in June 2007, somewhat of a challenge for the company and its leads Citi and JPMorgan. The deal consists of 2 classes of 6.75% coupon 2012 notes backed by 5.85m ordinary shares priced at $15.88, and 12.98m preferred shares priced at $13.73, respectively. The coupon on the 3-year notes came at the wide end of the 6.25%-6.75% price talk, while the conversion premium was set at 17.5%, the bottom of the 17.5%-22.5% range, say executives on the trade. A lower conversion premium is less desirable for the issuer, since it increases the chance of a conversion at a lower, more dilutive level Details on the book were not available as of press time, though the single remark from an executive at one of the underwriters was that it was “oversubscribed.” The deal should be seen understood as a straight equity issuance with Vale buying a call option over the coming 3 years at anywhere between $15.88 and $18.66, and selling investors a call at anywhere above $18.67, says a banker on the deal. The company remunerates investors for this optionality with a semi-annual coupon payments of $31.8m. This is the second big convertible Citi and JPMorgan have led for Vale in 2 years. The transaction should help the two companies’ league table standings for 2009. Competitors claim the deal was won by offering a small fee, heard in the 50bp area, compared to around 200bp-300bp for ordinary US convertible deals. Bankers on it decline to comment on the commission.