Forget flavour of the month: positive sentiment around India has shown no sign of abating since Narendra Modi took over as prime minister in May last year. A promising growth rate, a stable government and a decline in global commodity prices have combined to make India more attractive than ever as an investment destination.
But the same factors mean Indian assets are hard fought, and yields on Indian state owned companies and large Indian corporates are now paper thin, nearly at odds with its barely investment grade sovereign rating.
Banks are now increasingly looking at opportunities to finance private equity acquisitions in the country, as these leveraged deals offer good returns.
“Given the outlook change on India we are not interested in those [SOE] kinds of deals," said one banker. "We are actively looking at sponsor side acquisitions into India — there is not so much happening on the corporate side.”
Moody’s upgraded the outlook on India’s Baa3 rating to positive on April 9. The agency said India’s policymakers were establishing a framework that would “allow the country’s growth to continue to outperform that of its peers over the medium-term and improve India's macro-economic, infrastructure and institutional profile.”
Among upcoming deals, Crédit Agricole is tipped to be looking at a PE related situation in India, according to sources. The loan will hit the overseas syndicated market sometime in May. Details on the target and acquirers were not disclosed.
Another opportunity banks are keeping their eye on is Aditya Birla Group’s proposed reorganisation of its retail business. The group is negotiating with L Capital, Temasek and International Finance Corp to spin off its consolidated retail business to raise $500m, according to a report in the Economic Times on April 8.
“Banks will typically fund between 50%-75% of such [PE related] acquisitions,” said a Mumbai based banker at an international lender. He declined to give a range on what kind of pricing such loans would offer, saying it depended on the target and leverage.
If the deal goes to an LBO, it will join a few other notable offshore leveraged buyout financings for Indian firms in the past two years, such as Hexaware Technologies and the spin-off of business process outsourcing unit Minacs from the Aditya Birla Group.
Bookrunners and mandated lead arrangers DBS and ING wrapped up the $150m loan LBO loan for Minacs in August. That deal was split between a $130m term loan and a $20m revolver, with only the former being syndicated. The margin for the five year loan was based on a leverage grid, starting at 475bp over Libor based on a leverage ratio of more than 2.25 times.
Another offshore financing for an LBO in India was Baring’s acquisition of a stake in Indian technology provider Hexaware. The PE firm created a special purpose vehicle to raise the $215m loan. This borrowing was split into two tranches. Tranche 'A' was a $185m five year portion, with a margin of 500bp over dollar Libor, while tranche ‘B’ was a $30m 364 day bridge loan. The bridge was provided by bookrunners and underwriters Crédit Agricole, Deutsche Bank, Investec and Standard Chartered.
Uptick in PE activity
And figures for 2015 are already looking good. Activity between January and now has touched $2.38bn, according to data provided by Deloitte and sourced from Venture Intelligence.
Ola Cabs sold 16.67% of its stake to a consortium comprising Tiger Global, Accel India, Softbank Corp, DST Global, Steadview Capital, Falcon Edge Capital for $400m, making it the biggest PE deal in India so far this year, the data showed.
But not all sectors lend themselves to foreign debt financing, said market participants. Bank investors typically look for industries where they can have recourse to assets and cash flows of the target.
“There are some sectors that are debt friendly and some that are not,” said Kalpana Jain, senior director at Deloitte Touche Tohmatsu India. “Sectors that are amenable to debt are those in a position to provide collaterals. If it is manufacturing or retail then there could be debt, and in infrastructure there is definitely a debt component.”
In cases where the target is related to the power, coal, airports or road sectors, the general ratio of debt to equity is 70:30, she said.
“Purely on a credit basis Indian [state owned] banks will not be comfortable with PE firms’ model,” said the Mumbai based banker. “That kind of financing is usually done by foreign banks. The financing will not be on the PE firm's books because the cash flows are only in the operational target. It will be in the form of a classic leverage finance transaction where money is raised by the operating company.”
Companies that have an export element would be naturals for such kind of funding, said market observers.
Foreign debt raised at the target level would normally need to comply with India’s external debt regulations, said market participants. These stipulate borrowings of between $20m and $750m should have a minimum average life of five years. There is also a ceiling on all-in cost at 350bp over six months Libor for borrowings with a of 3-5 year maturity.
However, firms set up special purpose vehicles in other jurisdictions to get around these rules, said bankers.