Indian M&A lending springs to life

IFR 2502 - 23 Sep 2023 - 29 Sep 2023
5 min read
Americas, Asia
Prakash Chakravarti

India’s M&A market has burst into activity, with two deals promising to lead to debt financings totalling US$9bn–$9.5bn, and a variety of fundraising options being considered given the large sizes involved.

JSW Steel and Torrent Pharmaceuticals are at the centre of the action. The steelmaker is eyeing a 20%–40% stake in Canadian company Teck Resources’ metallurgical coal unit Elk Valley Resources, which could lead to debt financing of at least US$5bn–$5.5bn. Torrent is the frontrunner in the race to acquire an initial 33.4% stake in bigger rival Cipla from its founding family and is looking to raise up to US$4bn.

The proposed acquisitions and related financings would be the largest by both JSW Steel and Torrent – and they face challenges.

“Both deals are very large and in their early stages, so there are quite a few moving parts,” said a senior loan banker in Singapore, whose bank is hoping for a role in both financings. “We are looking at a mix of financing options as these deals will need to tap into different pools of liquidity to cross the finish line.”

Steely business

JSW Steel’s proposed acquisition of the stake in Elk Valley Resources will be through a consortium comprising Asian steelmakers that is expected to own 75% combined. JSW Steel is the dominant partner in the consortium, according to people familiar with the situation.

The target has sizeable debt on its balance sheet, which potential lenders are looking to refinance through recourse and non-recourse loans.

“The size of debt needed is large, at least US$5bn–$5.5bn,” said another senior loan banker in Singapore. “Apart from refinancing debt at the target, the sponsors in the consortium might also raise loans for their equity contributions. There are several possibilities – a term loan A in Asia or a term loan B or a bond in the US.”

JSW Steel is no newcomer to outbound M&A or offshore loan markets, but the latest acquisition would be its biggest overseas. Its previous largest M&A loan was in 2008, when it raised US$950m of recourse and non-recourse financing to acquire 90% of three US-based companies – Jindal United Steel, Saw Pipes USA and Jindal Enterprises – from Jindal Saw for US$810m.

JSW Steel had to navigate tough market conditions that forced it to flex pricing upwards on the recourse portions that were relaunched.

JSW Steel faces different challenges this time, although market conditions are similarly tricky. Any non-recourse financing would have to contend with the state of the US TLB market, which has only recently shown signs of revival after months of volatility.

On top of that, a diplomatic row between India and Canada after the latter’s accusation that India may have been involved in killing a Sikh separatist leader in Vancouver has led to tit-for-tat expulsions of officials from both countries.

“Raising all of the debt on a non-recourse basis will be very expensive for JSW Steel,” said the first banker. “But first the geopolitical issue needs to be cleared. I hope it does not become a deal-breaker for the Indian company.”

Environmental issues are also a factor as some banks are constrained from lending to any coal-related businesses. However, several bankers pointed out that Elk Valley Resources produces metallurgical coal, which is used in steelmaking, rather than thermal coal for power plants that is more damaging to the environment.

Debt dosage

Torrent’s pursuit of a controlling stake in Cipla could result in multiple fundraisings. The total consideration to buy the initial 33.4% stake, plus the maximum 26% for which it would have to make an additional tender offer, is expected to be north of US$8bn based on Cipla’s market capitalisation of Rs996.15bn (US$11.98bn).

Torrent, India’s third-largest drugmaker, is looking to tap private equity and credit firms for financing. Reuters reported on September 19 that the Indian pharma firm was in preliminary talks with Apollo Global Management for a loan of up to US$1bn to help fund its bid. Torrent has also held talks with CVC Capital Partners and Bain Capital, which might become equity partners in a consortium and jointly contribute as much as US$1.5bn to the deal, the report said.

Torrent will have to manage without one pool of lenders as Indian regulations prohibit domestic banks from financing the acquisition of an Indian company. Those that can still lend to Torrent will be constrained by the level of gearing that can be employed.

“A US$4bn debt financing for Torrent is already quite large, even after accounting for the combined earnings of both companies,” said the first banker. “Too much debt could lead to a downgrade in credit ratings and constrain access to domestic debt markets.”

Additional reporting by Chien Mi Wong and Krishna Merchant