Videocon’s oil & gas arm lines up low pricing on loan
Videocon Hydrocarbon, which has activities in upstream oil and gas, is tapping the loan market for a $75m three year refinancing. An aggressive margin cut compared with the loan the company is refinancing has caught the eye of bankers, especially when its sector and the financial health of its parent is taken into account. Shruti Chaturvedi reports.
Videocon Hydrocarbon, a subsidiary of India’s Videocon Industries, has approached lenders for a $75m three year loan to refinance existing debt. Deutsche Bank is arranging the facility, which could be increased by $40m depending on discussions with the borrower.
One factor that has attracted bankers’ attention is how much the company has managed to slim down pricing from the borrowing it is refinancing.
For example, the company paid a margin of 285bp on a $400m loan it raised in 2012 and that matured in October this year, according to Dealogic. Deutsche Bank was the bookrunner on that too, and had marketed Videocon Hydrocarbon’s loans mainly to Middle Eastern lenders in the past.
The company is now offering a margin of 170bp, marking a 115bp reduction from the previous loan. Those committing $20m or over for the lead arranger title make an all-in of 199.1bp. It has thrown in a sweetener in the form of a standby letter of credit from Union Bank of India but market participants feel the pick-up is not substantial.
“It seems really low,” said an India-based banker. “I mean, for Union Bank of India three year you’ll get 150bp-160bp so adding some 40-odd basis points on that seems a little less.”
He noted that the company’s oil fields are not fully producing yet and some are still in the exploration stage, meaning cash generation will take some time.
The company is in the upstream oil and gas sector and holds interest in oil and gas concessions in Mozambique, Brazil, Indonesia, and Timor-Leste. It has relied on SBLCs to attract liquidity for foreign currency loans in the past too, as it would struggle to find demand in its absence, said a banker who specialises on leveraged credits.
“It’s sort of standard for them to go to the market with SBLC-backed borrowings,” he said. “They borrow for short tenors like two years, three years and roll it over with another SBLC-backed facility.”
“I think the presence of an SBLC indicates the credit is not very strong by itself. It’s not to do with the sector or industry. It’s about specifics, how does their balance sheet look today? Have they incurred debt on oil production before, which stage of production is it at now?”
The SBLC is less for cost saving than for getting the deal past foreign banks’ credits, he reckoned. “At less than 2%, I don’t think I’m interested in funding them.” But the loan is of a relatively modest base size, which mitigates some of the pressure to generate momentum, he added.
Videocon expects proceeds from its oil and gas ventures to form a major part of earnings after three years, Live Mint newspaper reported in an article published on June 23.
Videocon’s oil and gas assets in Brazil and Indonesia were seen generating revenue from 2018 and turnover was estimated in the region of Rp100bn ($1.5bn) each, the paper said quoting Videocon chairman Venugopal Dhoot.
Videocon did not respond to a request for comment.
Same but different
Another company that recently sought an SBLC-backed loan was Bharat PetroResources (BPRL), a subsidiary of Bharat Petroleum. BPRL’s $125m loan, which launched in September, has DBS as mandated lead arranger and bookrunner. The deal is split into two tranches of $50m each and the third is for $25m. Bank of India, Canara Bank and Union Bank of India are providing the SBLCs.
But bankers close to that situation said the two credits cannot be compared like-for-like, as BPRL’s parent is owned by the state, while Videocon’s is not and has a high amount of debt on its books. They did note that BPRL is also loss-making as its oil fields are not yet producing.
“Indian banks [extending the SBLCs] are taking a longer term view on [Videocon Hydrocarbon and BPRL]. They are more familiar with their credit profiles than foreign banks. Getting an SBLC or not depends on the relationships of Indian banks with these companies,” said the leveraged credit banker.
Banks that have sanctioned letters of comfort/SBLCs for foreign currency loans raised by or to be raised by Videocon Hydrocarbon have security in the form of a first ranking pledge of 100% shares of obligors Videocon Oil Ventures and the borrower and charge over their fixed assets, the company said in its last annual report.
Parent Videocon Industries’ long and short term borrowings totalled Rp226.7bn ($3.4bn) as at December 31, 2014, while its total equity stood at Rp103.6bn and total assets stood at Rp381.7bn, according to its annual report.
Drilling for demand
There are two levels of participation open to banks. Lead arrangers committing $20m or more earn a fee of 80bp for an all-in of 199.1bp over Libor, while arrangers committing $10m-$19m earn 60bp for an all-in of 191.8bp. These are based on a margin of 170bp and an average life of 2.75 years.
Banks have been given until December 11 to submit their commitments.
Videocon Hydrocarbon is part of India’s Videocon Group, whose businesses span telecoms, real estate and consumer electronics.
The borrower will use the money to refinance loans from 2012.