Contingency plan
The most impressive Asian high-yield bond of 2020 has already been redeemed. Though short-lived, Vedanta Resources’ US$1.4bn benchmark was a bold deal that raised the bar for Asian acquisition financing.
In August, the Indian miner sold US$1.4bn of amortising three-year non-call two senior bonds to help fund a buyout of minority shareholders in its 50.1%-owned listed subsidiary Vedanta Limited. Investors had long called for the group to streamline its corporate structure so that cash could flow more easily up to the holdco to service debt.
The funding for the tender offer was the largest single-tranche high-yield bond from Asia in 2020, as well as the largest ever single-tranche issue from India on record.
More importantly, the deal showed that Asian issuers could use the international bond market to fund mergers and acquisitions, as long as deals are structured to accommodate investors’ needs.
The deal, with a weighted average life of 2.5 years and ratings of B3/B (Moody’s/S&P) was not an easy proposition on paper. India’s coronavirus crisis and concerns over Vedanta’s heavy debt burden had pushed its bonds to yields in the high teens, giving joint global coordinators and bookrunners Barclays, Credit Suisse, Deutsche Bank, JP Morgan and Standard Chartered a challenge to structure a deal that investors would find more palatable.
Vedanta’s existing bonds were unsecured and issued from the holding company level, but the new bond was issued by Vedanta Holdings Mauritius II with guarantees from the parent and certain subsidiaries. It was secured against 100% stakes in Vedanta Holdings Mauritius and Vedanta Holdings Mauritius II, the entities that would collectively own up to 49.9% of Vedanta Ltd acquired from minority shareholders if the tender offer was successful.
Proceeds were placed in an escrow account, to be used to acquire the remaining Vedanta Limited shares, with any surplus funds to be used to buy back the company’s 2021 dollar bonds.
The new issue priced at par to yield 13%, inside initial guidance of 13.25% area, and was increased from an initial target of US$1.25bn on a final book of US$2.4bn. As well as setting a better benchmark for Vedanta, it repriced the issuer’s existing dollar curve tighter.
In the end, the tender offer for the shares was unsuccessful, which triggered an early redemption of the bond. Bondholders were repaid 101% of their principal, plus accrued interest, while an accompanying US$1.75bn loan facility was also unwound.
Even after the market absorbed the disappointment, Vedanta’s dollar bonds were still trading at lower yields than they had been before the transaction, and it was able to come back to market later in the year at an improved pricing.
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