Tuesday, 25 September 2018

IFR India CM Roundtable 2010: Part 3

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  •  Nirav Dalal, Yes Bank; Kishore Kumar, HDFC Bank
  • Keith Mullin, Editor-at-Large; IFR
  • India IPO volumes
  • India ECM breakdown, by issue type

IFR: One of the issues that always comes up when discussing M&A in India is the fact that a lot of companies are family owned. This has acted as a drag on M&A activity. Are things changing on this front? Are family-owned companies willing to sell out or dilute?

Kishore Kumar, HDFC Bank: Yes. I think just as the make or buy decision for a corporate I think Indian entrepreneurs are also now increasingly at a crossroads and are facing decisions as to whether they continue to run their companies or cash in and take the money while the going is good. We have already seen a couple of large examples of that in the pharmaceutical sector and I think there are going to be increasing occurrences where deals will happen as a result of that.

I think Indian owners are becoming much more pragmatic, because it’s a question of making a call on the incremental outlook for ROE. So if they feel ROE on a certain business has plateaued, they understand there is probably little point in hanging onto it for sentimental reasons so therefore they are ready to exit. We will definitely see greater inbound acquisition activity happening.

As for outbound acquisitions, I agree with Kalpesh. There may not be too much need for LBOs because assets are available in Europe at close to book value, so there is not much activity happening in that regard and not many people want to acquire those assets. But Indian companies that have deep pockets are looking outside and the valuations on deals they said no to three years back are back on in some cases because assets are available at throwaway prices.

And some of the European banks who had shut the stable door and become ultra-conservative over the past couple of years of shocks now have too much money so are ready to lend. Continental, for example, which had a junk rating, was able to raise money quickly at 100bp lower in the most recent tranche that it raised abroad. For some of the Indian companies who want to acquire companies abroad and are willing to provide the corporate guarantee of the Indian parent will be able to raise good money to finance such acquisitions.

IFR: Nirav, what kind of pipeline do you see and what are your expectations, based on conversations you have with clients?

Nirav Dalal, Yes Bank: I have never seen the kinds of activities that we have seen in the Indian domestic bond market that we’ve seen in the last six to 12 months. I don’t think I have seen the Indian bond market as active and vibrant, and I’m not only talking in terms of the volume of issuance but more in terms of the nature of corporates that have been accessing the domestic bond market. And as somebody was pointing out earlier, we rarely used to see non-Triple A issuers accessing the Indian capital markets. Today the amount of issuance that has been done in the sub Triple A segment over the last six to 12 months has exceeded our wildest expectations.

So we’ve been very pleasantly surprised by the fact that there is a tremendous interest insofar as corporate India is concerned in terms of the domestic bond market. The use of proceeds could be plain long term working capital financing, it could be a war chest for potential acquisitions or it could be purely refinancing existing expensive foreign currency or rupee debt. So I’ve never been so optimistic about the Indian bond markets as I think I am right now.

IFR: Prakash: are the kinds of highly structured acquisition financings that we see in international markets available here in India?

Prakash Subramanian, Standard Chartered Bank: Sure. I think one of the things you look at when you mount an acquisition is obviously building a war chest and have it ready or once you’ve identified a target. The first thing which we’ve seen in most transactions is you tap the short term loan market immediately for a six-month to one year bridging facility. You go to your relationship banks and raise money straight away from these guys.

At the end of that period, once the acquisition is completed, you look to takeout financing either in terms of another loan or a bond. In terms of the bond market, investors don’t have a full picture of the acquisition prior to it happening and they obviously want to know what the consequences are post the acquisition. So once the acquisition is made, the rating agency comes up with a much more detailed analysis of what the synergies are and how it works out, what sort of financing the company is planning.

So there is a lot of talk going on and we are seeing some of the acquisitions which happened two to three years back - such as Tata Steel/Corus and other deals - where there are options which are being talked about both in the loan and bond market and once again both in local currency and foreign currency.

We are seeing some of the foreign acquisitions that have been done where the takeout is maybe a dollar bond, either a holdco financing or an SPV financing, which is likely to get a rating and is more acceptable in the international markets. So we are seeing some moves on that side.

Refinancing this way offers a longer tenor - a minimum of five years going as long as 10 years. The deal can be structured in such a way that the rating will be more or less acceptable. So it goes off the Indian balance sheet when you do it as a holdco financing outside of India. And third and foremost is the depth of the offshore bond market. You can easily raise US$1bn-$2bn in the international market. That may be that much more difficult in the rupee bond market where you can probably do up to a quarter billion or half a billion at most because investors do not have a full view of what the acquisition is all about.

And there’s the issue of what you provide as security for the acquisition because most Indian bonds have to be rated, listed, secured etc. These are the challenges. But in general, if the primary financing is happening through the short term loan route, the takeout financing is across the spectrum and the issuers are looking for the cheapest mode of financing within those options..

IFR: Moving from M&A to our next theme, I’m keen to discuss briefly the government’s disinvestment programme. This had its problems earlier in the year, but Coal India is on the blocks and steel, shipping, power and copper are all tabled. Sunandan: is there political agreement that this is the right thing to do? One of the things that has always dogged privatisation in India is political opposition. However, there seems to be an across-the-board consensus that disinvestment is a good thing.

[NOTE: The Roundtable was held in mid-September, before Coal India’s Rs155bn IUS$3.5bn) IPO in late October. The deal priced at the top end of its marketed price range, was 15 times oversubscribed and ended up being the largest public listing in Indian history.]

Sunandan Chaudhuri, SBICAP Securities: I think if there was a time when you had a good chance for disinvestment this is the right time. For one, the government is ever so cognisant of the fact that we have to bring down the fiscal deficit. This is not to say that the disinvestment programme even carried to the fullest is going to plug the entire fiscal gap but it will go a substantial way to plugging the fiscal gap and bringing the fiscal deficit to GDP ratio down progressively over time as the government targets.

So I think the economics of it is very much in place. You need a strong disinvestment programme so that your fiscal deficit to GDP ratio goes down. As far as political will is concerned, then we are running into a grey area in terms of bringing all the partners and all the stakeholders together. But I think given the kind of majority that the government enjoys right now I think this is the best time and yes at the ministerial level we do have a lot of talk and a lot of will to carry the disinvestment programme forward and share the assets of public sector enterprises with retail investors and make this ownership more broad based.

IFR: Raman, what shape are the candidates for privatisation in from a credit perspective? They’re in core sectors. Are they going to be privatised clean?

Raman Uberoi, CRISIL: I would guess so. Most of the companies that are coming to the market are blue-chip, enterprises, not those that are under pressure or have not been doing well. Coal India, Power Grid etc are Triple A entities which obviously are very strong in the business in which they are in. In fact, Power Grid and Coal India are monopolies, so they are very strong. I’m not an equity guy but I guess their issues should do well.

IFR: I guess the panel is made of predominantly of debt bankers. Rakesh: one of the things that everyone is complaining about on these deals is the low fees the government is paying. The issue is that if banks aren’t being paid adequately, they won’t necessarily give the deals proper care and attention from a research perspective, from a distribution and aftermarket perspective and so on. Is there an element of truth in that?

Rakesh Singh, Rothschild: Before I answer that, I’ll just comment on the question you put to Raman, which was a very interesting question. With mentioning any names, I think there are a couple of companies that are not yet ready to go to the capital markets, but there is pressure to sell them. If these companies are restructured, you could see more shareholder value being created. But unfortunately I think people are in a hurry to sell.

As far as fees are concerned, which is your second question, fee compression in the debt market has been an issue for years. Debt underwriters used to moan constantly that they didn’t get paid. I think the problem has simply passed to the equity markets. Bankers see a piece of business out there and the issue of league table credit sometimes comes into play. They need to realise they need to make their bread and butter as well.

As far as research and research coverage is concerned, you don’t do research for a company; you do it for investors. If you’re a global capital markets bank, I think it will be a gross injustice if you take a company to the market and do not provide aftermarket support or engage in research coverage. I think any global bank which takes on a mandate irrespective of the fee will provide proper research and aftermarket coverage. And any global investor will expect you to cover the stock.

Prakash Subramanian, Standard Chartered Bank: I think this a question of priorities. The government’s priority is to raise money to fund the deficit. So if you look at it from that perspective, is it the right thing to do? Probably yes. The market is reaching its peak once again and the time is just right for them now to go into the market. The issue of fees, which Rakesh answered, is as much created by the bankers shooting themselves in the foot.

But there are challenges in pushing the programme through. If you look at all the issues which have taken place, the question is how you disinvest. Should it be a general IPO where you go into the whole market? We haven’t really seen retail participation in a lot of the issues. In fact, in most of the cases, retail participation has probably been undersubscribed. So that’s going to be a big challenge for the government.

If your objective is to achieve a wider reach, then I don’t think we are solving the purpose. If you’re trying to get the maximum valuation and pricing, then it’s probably better to go through the QIB route and get a few foreign investors who will come in, value your company and give you the money for it. So it’s a debate which is continuously going to happen.

The government obviously wants to be on the right side of the public because you have a lot of political parties which are trying to pull against one another. The moment you say it is for the masses they don’t want to object. The moment you say you’re going to sell it to foreign investors there will be a serious objection. So I think it’s just a balancing act they are trying to achieve at this stage. But from a priority perspective, the priority is to raise money to fund the deficit.

IFR: Fair enough. But once they’re in the private sector, will these companies provide good financing opportunities to bankers like yourselves?

Nirav Dalal, Yes Bank: Well a lot of these are ongoing concerns. As Raman was saying, most of them already enjoy good ratings. A lot of them already access the debt capital markets for their funding requirements so debt markets are not something new to them. Possibly equity markets are, for which they’re gearing up now. But to answer your question looking for funding from the bond markets in India is not something new to a lot of the corporates that are getting privatised now.

IFR: Okay and I’m just conscious of people who’ve been sitting and listening very patiently so before we close I wanted to throw out an opportunity for anyone in the audience to ask questions.

Audience: I would like to ask if we’ll ever see a junk bond market in India. What needs to happen? If it does evolve over the next five, 10, 15 years, what would be the credit spreads over government bonds?

Prakash Subramanian, Standard Chartered Bank: Well we’ve started to see a little bit of activity in space below Double A or Double A minus this year so targeting Single A, but the proportion of new issuance in this area is less than 5% of the total market. I think the biggest challenges today are twofold. First, we do not have a CDS market in India. RBI is coming up with drafts etc but the market has yet to implemented. So I think this is certainly one area we need to seriously look at.

Second is the players in the industry today. As Raman was mentioning some time back, most of the guys are only looking at the top layer, the Triple A or Double A category whereas if you look globally, you have a lot of insurance companies willing to provide insurance cover, or credit enhancement, or provide CDS on lower-rated corporates. So I think your question of 15 years down the line, maybe yes but the way we would probably want it is to go first into the Single A area or the Triple B+ category and develop a CDS market. We also need some insurance regulatory changes which allow insurance companies to participate actively and offer more credit enhancement in this space.

IFR: How about a guess of a spread over a benchmark for a Double B rating in 15 years?

Prakash Subramanian, Standard Chartered Bank: I’m sure the RBI will come out with guidelines on that!

Rakesh Singh, Rothschild: The simplest answer is get a buyer and the market will manufacture a junk bond for you.

Nirav Dalal, Yes Bank: If I can answer a little differently. More than finding a buyer, my question is whether there are people willing to borrow in that rating category through the bond market. The reason we have a junk bond market globally is more down to the fact that bond markets globally are the principal source of funding for corporates. As far as India is concerned the principal source of funding has always been the banking channel primarily, even today.

I don’t think that’s going to change. I don’t think you’re going to see a lower-rated corporate or a non-investment grade corporate ever having the need to go out and access the bond market because its funding requirements are more or less being met through this original channel of bank funding.

IFR: Anyone else got a question?

Audience: Deepak Parekh (chairman of HDFC) recently mooted a Rs500bn infra fund that was vehemently criticised by most of the banks and insurance companies. Why do you think there was so much resistance to that? Second: in South-East Asia for the past 40 odd years there has been a lot of reliance on bank funding yet they have been able to fund a huge amount of infrastructure funding. What lessons can we learn from that?

Kalpesh Kikani, ICICI BANK: Let me take a stab at the second part of your question. I must present my bias up front. I have been a loan banker all my life so I am happy to hear you say that bankers have met all the requirements that corporates have. If banks can continue to do that, the desperate need for developing a bond market will become less important.

The loan market has been able to meet all the needs of corporates, from long term infrastructure to short-term trade and everything in between. That’s history and even when the markets were at their peak in 2007 we still found that the bank market in Asia was able to innovate enough to be able to meet the needs that corporates had in all kinds of structures.

This is where traditionally banks would fall short. Banks tend to be slower stodgy institutions and bond dealers are supposed to be the innovators. But even in 2007 people still moaned that Asia didn’t have enough sub-debt or high yield debt investors and all that stuff went eventually to the loan A, loan B and loan C structures.

So my answer to the question is: as long as banks continue to be reasonably nimble and keep on meeting the needs of corporates, the need to develop a higher-risk category bond investor is not there and you need that hunger to push a lot of people to feel the need for Single, Triple B, Double B paper. But let me repeat my bias as a loan banker.

Prakash Subramanian, Standard Chartered Bank: The point you raised in terms of Deepak Parekh wanting to raise this fund. There have been several rounds of discussion with the Ministry of Finance whether globally India should be raising money, which is a sovereign wealth fund sort of thing to help infrastructure projects. We’ve already seen three previous initiatives in this area: Manmohan Singh’s ILF, then IDS and now India Infrastructure Finance Co Ltd (IIFCL). The purpose of all of them has been infrastructure financing but all three of them have gone into the loan market or into diversifying funding outside of infrastructure into allied infrastructure financing. So the latest idea would create a fourth entity. Does it really solve the purpose, because neither of the first three has met its objectives?

IFR: Gentlemen, on that note, we’ll close. Thank you all for your time and attention.


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