In 2007, India’s largest papermaker Ballarpur Industries (also known as Bilt) bought a Malaysian company, Sabah Forest Industries, for US$261m. It was a distressed asset, purchased from the Lion group. It was a potentially transformational transaction for Bilt because it gave it access to pulp and fibre, a more scarce resource in India than in Southeast Asia. Sabah Forest operated the largest pulp and paper mill in Malaysia, alongside a concession for 289,000 hectares of forestland from the state government of Sabah, valid up to 2094. The deal turned Bilt into a fully integrated play, covering the value chain from the forests to the end product.
It looked good, but as Rajeev Ahuja, head of debt capital markets for Citi in India, noted, “the story in the equity markets was not getting translated. There are very few obvious comparables in the pulp and paper business in India and people were not attributing a great deal of strength to the acquisition, although it was a very high cashflow generator over time.” Integrated players in Europe or in other Asian markets were being much more highly valued.
Also, the transformed business needed a better approach to financing. “You need a lot of financing flexibility,” said Ahuja. “If you have the ability to do longer-term debt over a couple of economic cycles, you can manage the volatility of pulp and product prices and get cash flow flexibility.” But in India, there are tight restrictions around raising foreign currency debt.
Citi and Bilt worked together on a major corporate reorganisation to get around these issues. First Bilt injected three manufacturing plants into a subsidiary, BILT Graphic Paper Products, for Rs19.5bn. Then another subsidiary called Ballarpur Paper Holdings, which crucially is incorporated in the Netherlands and which owned 97.8% of Sabah Forest, bought BILT GPP, also for Rs19.5bn, with Bilt using Rs10bn of the funds to pay down debt and conduct a share buyback. Doing so put the Indian and Malay assets into the same vehicle. This Dutch-incorporated subsidiary then brought in new investors, selling 21% of itself to the Government of Singapore Investment Corp and JP Morgan Special Situations Asia for US$175m.
The restructuring, and the reorganisation of the debt structure, “is more integrated and gives lenders more comfort,” said Ahuja. “Down the road, they will be able to leverage in a more co-ordinated manner than at the piecemeal local levels.”
On the financing side, a US$200m leveraged buyout and capex loan was signed in June 2007, before this year Citi set about putting together a US$560m financing. This five to six-year financing launched into sub-underwriting in late May and at the time of writing was about to enter general syndication. Citi was joined by ING, Rabobank, State Bank of India and West LB as joint leads.
At US$560m, this was is a lot of offshore debt to get past an Indian regulator: sums above US$500m in any given year are typically very difficult to approve. Consequently the Netherlands domicile of the holding company was vital. “Because this is an offshore company, even though it has Indian and Malaysian assets, we really are not impacted by the Indian regulatory requirements,” said Ahuja. “It allows them to be flexible in how they raise debt and deploy capital, and it evens the field compared to Asian and European players.”
While the circumstances of Bilt’s reorganisation are clearly very specific, the broader idea of a restructuring through an offshore holding company to improve access to the debt markets may have wider utility in India. “Each situation will be unique, based on assets and ownership and the market environment,” said Ahuja. “But if you look broadly at how Indian companies have grown in the last two years, a lot more investments have come from the large industrial groups going offshore. Often companies are finding the cashflows they generate offshore are bigger than those in India.”
Ahuja added: “We are in discussions with a number of groups, not necessarily on templating Ballarpur, but saying: the markets are not giving you the value for your global business, how do you capture value and avoid dilution?”