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Friday, 15 December 2017

Back with a bang on the acquisition trail

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Indian loan volumes are set to break records in 2010, thanks largely to a resurgence of merger and acquisition activity.

International lenders have become increasingly dependant on mergers and acquisitions to drive their Indian lending business. Two slow years restricted lending opportunities, but Indian companies are once again turning to the offshore markets for expansion.

Two big-ticket transactions are in the limelight at the moment, marking somewhat of a revival of the acquisition financing boom that saw India catapult to the forefront of activity in the region.

Bharti Airtel is in the market with a US$7.5bn loan to support its purchase of Zain’s African operations, while Vedanta Resources is set to test the market with a US$6.5bn financing facility for its acquisition of Cairn India. If both deals go through, they will make 2010 the biggest year for Indian loans.

Loan volumes had already reached US$43bn in mid-August, and this did not include the two giant acquisition financings that account for US$14bn combined.

The US$43bn is already well ahead of the US$41.84bn recorded in 2007 when financings tied to Indian M&A again drove business volumes higher. Some of those acquisition loans were refinanced in the ensuing years, but the local rupee market has dominated. Around US$21.93bn of the US$40.31bn transacted in 2008 was denominated in rupees, while US$39.98bn of 2009’s record volume of US$46.03bn came from the rupee market, largely from project financings.

Indian companies held back any plans they may have had to pursue assets overseas during the global financial crisis, but bankers are confident that the new wave has a lot further to run.

“M&A volumes will definitely increase substantially in the next 12 months, which will result in a material increase in loan dealflow as well. Recent large financings such as the one for Bharti prove that there is appetite among foreign lenders for Indian paper,” said Brijesh Mehra, country corporate and investment bank head at RBS in India.

“2010 seems on pace to be a record year as M&A becomes an important component of the growth strategy of an increasing number of Indian corporates with regional and global leadership aspirations. This will lead to an increasing number of attractive financing opportunities for lenders,” said Rajiv Nayar, head of capital markets origination, India at Citigroup.

Three banks - Standard Chartered, Credit Suisse and Goldman Sachs - are underwriting a US$6.5bn loan for Vedanta, which is in the market at the same time as Bharti.

Bharti emerged successful on its third attempt to buy a sizable foreign telecommunications entity, agreeing to acquire Zain Africa after two years of failed negotiations with South Africa’s MTN Group.

To fund the US$10.7bn takeover, Bharti is raising US$7.5bn in a multi-tranche loan. Had Bharti been successful at its first attempt to buy MTN in May 2008, the funding requirement would have been more than double the figure the Indian telco is raising now.

While that would have been a real test of appetite of the offshore loan markets for India paper, Bharti’s latest financing is equally challenging in view of the market conditions prevalent when it was first mandated and an arranger group put together. Its second attempt in 2009 could have led to a much smaller US$4bn offshore loan in a sign of the difficult market conditions, but the merger foundered at the last hurdle.

Liquidity in Asian loan markets is strong, but the prevailing conditions are nowhere near back to normal as they were before the crisis. Yet, the putting together of two jumbo loans totalling US$14bn is a strong indicator of revival in sentiment. Vedanta’s US$6.5bn loan will come to the market even as finishing touches are put to Bharti’s facility.

Pricing on the loans is another sign of the changes in market conditions.

In late May 2009, when Bharti renewed its interest in a merger with MTN, it started discussions with lenders for a US$3bn-$4bn offshore loan with a tenor of 12-18 months. In early October, when the merger was abandoned, Bharti had put together a circa US$4bn multi-tranche loan with tenors of two, three, four and five years. Pricing was initially rumoured to be at around 500bp over Libor for the 12-18-month bridge and was eventually whittled down to 315bp over Libor (based on an average life of 3.65 years) by early October.

Bharti’s US$7.5bn financing to back its acquisition of Zain Africa is even more tightly priced. It features tenors of three, four, five and six years and pays a blended top-level all-in of 193.1bp over Libor for a remaining average life of 4.4 years.

“The reception from foreign lenders for the jumbo financings for Bharti Airtel and Vedanta Resources proves that India is on par with international financing markets. Lenders familiar with this territory have the depth, expertise and appetite to understand and digest such complex, large-sized deals. Financings backing cross border M&A by Indian acquirers are still largely the preserve of foreign lenders and some large Indian banks, which may not be the case with other countries, such as China and Korea,” said Sumit Dayal, managing director, global head leveraged finance at Standard Chartered.

Prakash Chakravarti

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