Still strong

IFR India Special Report 2011
9 min read

Bankers are confident that upcoming India M&A financings will be strongly supported, despite recent global market volatility.

To view the digital version of this report, please click here.

Many Indian acquirers seeking US dollar borrowings – mostly for overseas assets – have hit the market in the last 18 months and there are no signs that such activity is slowing. A significant driver of growth in offshore loans will continue to be resources- and commodities-related acquisitions, likely in either Australia or Indonesia, said B Krishna Iyer, head of ICICI Bank’s international syndications group, at the Asia Pacific Loan Market Association annual conference in June.

Indian companies had “huge resource requirements” and were currently looking at potential acquisitions in Asia, Europe and Africa, said another India-focussed loans banker. In particular, “many power producers are looking to acquire coal mines. The significant shortage of coal in India is not going to change anytime soon”, said a third banker.

Of late, there have also been healthy offshore acquisition activities in other sectors.

Loans backing Aditya Birla Group’s US$875m acquisition of US-based Columbian Chemicals closed heavily subscribed in the first half of this year. With ANZ, Bank of America Merrill Lynch, HSBC, RBS and Standard Chartered as leads, the cross-border deal involved loans totalling US$350m to Indo-Egyptian and Thai joint venture companies, and financing, which relied on the credit of the US target.

Despite the turmoil in Egypt at the time, both the Thai and Egyptian loans were well-received in syndication by both onshore and offshore banks – partly because of the strength of the sponsor, said an India-focussed loans banker at an international bank.

Business process and technology management company Genpact signed a US$380m loan to back its acquisition of IT services provider Headstrong Corp in June. Nine banks joined original leads BAML, Citigroup, JP Morgan and UBS in senior syndication. Although general syndication was originally on the cards, it was not, in the end, needed.

“High-quality sponsors making synergistic acquisitions offshore have received solid support from the banking industry, both onshore and offshore,” said a Mumbai-based loans banker.

Unique challenges

Other recent India M&A financings illustrate how events beyond bankers’ control can drastically affect deal timelines.

In March, ICICI Bank prefunded and launched into syndication a loan of US$800m to back Lanco Infratech’s acquisition of Australia’s Griffin Coal. Bank of India joined as sub-underwriter with US$200m. Come May, in general syndication, three more Indian banks had committed a total of US$140m.

In June, Australia-based Perdaman Industries filed a lawsuit against Lanco in relation to a coal-supply agreement with Griffin Coal. Lanco has called Perdaman’s claim “baseless”, although a decision on the lawsuit is still pending. The deal is still currently in syndication.

In August last year, Cairn Energy agreed to sell a majority stake in Cairn India to mining giant Vedanta Resources in, what will be, one of the largest deals in India’s energy sector. However, completion, which requires Indian Government approval, has been delayed due to a disagreement over royalty payments involving Oil & Natural Gas Corp, Cairn India’s partner in the Rajasthan oilfields.

Senior syndication of a US$3.5bn portion of the original US$6bn financing was launched last December with eight international banks as leads. The syndicated amount was later reduced to US$2.97bn, after the purchase price for a 40% stake was reduced to US$6.023bn from US$6.651bn in June. It was originally hoped that syndication would close in one or two months, said a source familiar with the matter.

However, government approval, considered to be a “key milestone” in the syndication process was a long time coming, allowing senior syndication to close only recently. Vedanta announced that it had received formal notification of conditional approval of the acquisition on August 1 – around a year after the proposed acquisition was unveiled.

The deal illustrated how regulatory hurdles in an uncertain environment could affect acquisitions in India, said the loans banker.

Still, the US$2.97bn syndicated loan managed to net US$730m from five banks in a selldown. StanChart agreed to underwrite US$1.35bn, while the other seven international leads came in on a take-and-hold basis. Asian liquidity totalled US$280m – from Bank of China, DBS and ICBC – about 40% of the amount received in syndication. Many European banks were nervous about environmental issues relating to Vedanta’s India businesses and “were not able to cross that bridge”, said the banker.

Pricing for Indian M&A loans has varied considerably. “It completely depends on sponsor quality,” said one loans banker, who referred to pricing from about 180bp to 450bp.

Last year’s US$7.5bn multi-tranche syndicated loan for Bharti Airtel to back its acquisition of Zain Group’s mobile operations in Africa offered a blended margin of 180.6bp and top-level all-in of 193.1bp in general syndication, based on a remaining average life of 4.4 years.

The US$2.97bn syndicated portion of Vedanta’s acquisition financing offered a blended all-in of 335bp for the 18-month tranche and 390bp for the three-year tranche.

Mid-tier borrower Lanco Infratech’s loan offers an all-in of 430bp based on a three-year term.

With the present Eurozone and US debt crises, “there has been general talk of a 50bp–70bp widening of price, but when deals hit the market, things might be different,” said a loans banker at an international bank. The banker predicted that pricing would continue to be mainly sponsor driven.

Indian banks were expected to be willing to “always support certain borrowers” for relationship reasons, said a Singapore-based loans banker. However, their relatively high costs of funding generally limit their participation in top-tier, more tightly-priced deals.

Meanwhile, foreign banks continued to be keen on top-tier names, with appetite commensurate with risk, said a loans banker at an international bank. M&A deals, which were generally priced above corporate loans, made them attractive for syndication, said an India-based banker.

A girl selling bubble-making toys, blows bubbles to attract buyers in Mumbai.

Source: Reuters/Arko Datta

A girl selling bubble-making toys, blows bubbles to attract buyers in Mumbai.

Still, some international banks were becoming more cautious, said the first banker. “Banks were a lot more gung ho coming out of the first half of last year”.

The jumbo US$7.5bn Bharti loan that its 11 original MLAs and bookrunners prefunded in June last year garnered less than US$1bn in syndication.

The original US$6bn financing from eight lead banks to back Vedanta’s Cairn India acquisition was structured to reduce syndication risk. It comprised a US$1.5bn “bridge-to-bond” facility (which a US$1.65bn bond in May refinanced), and a US$1bn “bridge-to-equity” facility (which Vedanta announced on August 19 had been reduced to US$270m), as well as the original US$3.5bn syndicated portion, according to bankers.

As for future sources of liquidity, “there may be less coming from European and American banks”, but Asian liquidity remained very strong, said a banker.

Many Indian borrowers were so confident that they would face few constraints on liquidity that they would “pursue acquisitions without engaging banks at an early stage,” the same banker added. Lending appetite reflected banks’ “valuation prospects for India” and it would be “strategically difficult” for them to withdraw their support, the banker said.

Healthy pipeline

Indian companies have, in particular, been actively buying up – and are presently eyeing – significant Australian resources-related assets.

Aside from Lanco’s purchase of Griffin Coal this year, Adani Enterprises’ Mundra Port unit bought Australia’s Abbot Point Coal Terminal in May. Banks have been in talks on the takeout of the US$2bn one-year bridge financing that State Bank of India and StanChart provided.

GVK Power has negotiating the potential purchase of two Australian coal mines from Hancock Prospecting since February. ICICI and StanChart have been in talks with GVK on potential financing of the deal, which is estimated to involve an initial investment of US$1.3bn. GVK may have to arrange up to US$7bn more over the six years in working capital and other investments, sources have told Reuters.

Meanwhile, Indian companies have dominated the list of shortlisted bidders for Australian coal explorer Bandanna Energy in a potential billion-dollar plus sale. GMR Group, NTPC, Jindal Steel and Power, JSW Steel and Aditya Birla Group have all been reportedly eying the assets, along with some Chinese firms. GMR, NTPC, JSPL have reportedly recently pulled out of the race for different reasons.

However, all of the potential Indian bidders are top names and any one of them, if successful, will be expected to receive “strong support” from both local and foreign banks, according to several loans bankers.

By Maggie Chen , Loans Correspondent

India_Syndicated loans01
India_Syndicated loans02