Capital Markets, China, Commodities, Corporate Finance and M&A, India, Infrastructure - Saturday, September 20, 2008 21:33 - 0 Comments

IFR deal profiles: Ballarpur, Reliance Power, Tata, China South Locomotive

IFR, World Bank edition

Ballarpur Industries

An acquisition and financing for an Indian company could prove to be an influential model for others to follow.

In 2007, Ballarpur Industries (also known as Bilt), India’s largest paper maker, bought a Malaysian company, Sabah Forest Industries, for US$261 million. It was a distressed asset, purchased from the Lion group, and it was a potentially transformative transaction for Bilt: it gave it access to pulp and fibre, a more scarce resource in India than in southeast Asia. Sabah Forest operated the largest pulp and paper mill in Malaysia, alongside a concession for 289,000 hectares of forestland from the state government of Sabah, valid up to 2094. The deal turned Bilt into a fully integrated play, covering the value chain from the forests to the end product.

It looked good, but as Rajeev Ahuja, head of debt capital markets for Citi in India, notes: “The story in the equity markets was not getting translated. There are very few obvious comparables in the pulp and paper business in India; and people were not attributing a great deal of strength to the acquisition, although it was a very high cashflow generator over time.” Integrated players in Europe or in other Asian markets were being much more highly valued.

Also, the transformed business needed a better approach to financing. “You need a lot of financing flexibility,” says Ahuja. “If you have the ability to do longer term debt over a couple of economic cycles, you can manage the volatility of pulp and product prices and get cashflow flexibility.” But in India, there are tight restrictions around raising foreign currency debt.

Citi and Bilt worked together on a major corporate reorganisation to get around these issues. First Bilt injected three manufacturing plants into a subsidiary, BILT Graphic Paper Products, for Rs19.5 billion. Then another subsidiary called Ballarpur Paper Holdings, which crucially is incorporated in the Netherlands and which owned 97.8% of Sabah Forest, bought BILT GPP, also for Rs19.5 billion, with Bilt using Rs 10 billion of the funds to pay down debt and conduct a share buyback. Doing so put the Indian and Malay assets into the same vehicle. This Dutch-incorporated subsidiary then brought in new investors, selling 21% of itself to Government of Singapore Investment Corp and JP Morgan Special Situations Asia for US$175 million.

The restructuring, and the reorganisation of the debt structure, “is more integrated and gives lenders more comfort,” says Ahuja. “Down the road, they will be able to leverage in a more coordinated manner than at the piecemeal local levels.”

On the financing side, a US$200 million leveraged buyout and capex loan was signed in June 2007, before this year Citi set about putting together a US$560 million financing. This five to six year financing was launched into sub-underwriting in late May and at the time of writing was about to enter general syndication. Citi was joined by ING Bank, Rabobank, State Bank of India and West LB as joint leads.

US$560 million is a lot of offshore debt to get past an Indian regulator: sums above US$500 million in any given year are typically very difficult to approve. Consequently the Netherlands domicile of the holding company was vital. “Because this is an offshore company, even though it has Indian and Malaysian assets, we really are not impacted by the Indian regulatory requirements,” says Ahuja. “It allows them to be flexible in how they raise debt and deploy capital, and it evens the field compared to Asian and European players.”

While the circumstances of Bilt’s reorganisation are clearly very specific, the broader idea of a restructuring through an offshore holding company to improve access to the debt markets may have wider utility in India. “Each situation will be unique, based on assets and ownership and the market environment,” says Ahuja. “But if you look broadly at how Indian companies have grown in the last two years, a lot more investments have come from the large industrial groups going offshore. Often companies are finding the cashflows they generate offshore are bigger than those in India.”

Ahuja adds: “We are in discussions with a number of groups, not necessarily on templating Ballarpur, but saying: the markets are not giving you the value for your global business, how do you capture value and avoid dilution?”

CHINA SOUTH LOCOMOTIVE

The pattern of the moment for A-share/H-share combinations is to do the A-share first, then the H-share three days later. That’s the approach China Railway Construction took for its IPO back in March, and it was still in vogue by the time China South Locomotive Rolling Stock (CSR) launched its own float in Shanghai and Hong Kong in August.

CSR is the largest manufacturer of rolling stock in China, and one of the largest globally. Its output includes locomotives, passenger carriages, freight wagons, rapid transit vehicles, and more recently high speed trains (known in industry parlance as EMUs), where it is considered a leader. Apart from its scale as a manufacturer, it stands out for its R&D expertise, and has the largest facility for electric locomotives in China. It owns a National Engineering Research Centre for converters, a laboratory for high-speed multiple units engineering, five state-accredited technology centres and four post-doctoral working stations, among other things.

It’s in a fascinating sector, with the PRC government committed to developing the nation’s railways, and active in many ambitious high-speed train projects. “Also, the management team are excellent,” says someone who has worked with them. “They have been in the industry for many years. It’s not like some of the telcos or life insurers where they’ve been shuffled around; a lot of them are engineers by background and have been manufacturing trains all their professional lives.”

The A-share offering was handled by CICC and Industrial Securities, raising RMB6.54 billion. As is often the case with A-share issues, the fervour was something remarkable: it was 365.5 times oversubscribed on the retail side, 273 times on the institutional. It priced at the top of its range, equivalent to a 2008 P/E of 16 times, but even so it captured some attention for its rational pricing, opting to go for what it is by international standards a quite sensible valuation rather than taking advantage of the huge demand to push the price much higher.

While this seems a kind thing to do to investors, there was no doubt a pragmatic consideration as well. Since China Railway, the norm from the China Securities and Regulatory Commission has been to insist that H-share offers are priced either equal to or at a premium to the H-shares. Keeping the A-share valuation reasonable therefore gave the H-share deal a much better chance of getting away.

That H-share, led by CICC and Macquarie, raised HK$4.16 billion. Again, there was clearly an intent to make sure the deal didn’t plummet in the aftermarket, with the deal pricing around the middle of the HK$2.49-2.76 range at $2.60, despite the Hong Kong public offer being 13 times covered. “It could have been priced right at the top,” says someone close to the deal. “It was an extraordinarily strong book.”

Three cornerstone investors were aligned for the deal: China Life Insurance, General Electric Capital and Mirae Assets Financial, the Korean pension fund. Each bought US$30 million of shares, under a six-month lock up. The book is also believed to have included a number of Hong Kong tycoons and some sovereign wealth funds, although they were not formalised as cornerstone investors. On the H share deal, 60% of the book went to Asia, 25% to the US and 15% to Europe; by investor type, more than 60% went to institutions (mostly mutual funds and pension funds, with some hedge funds), 30% to private banks and high net worth, and the balance to corporate investors.

The deal took 16 months from start to finish, which is a short timespan for a deal of this scale. It was also challenging to get a deal away in August, a time when many potential investors are not around – and this particular August featured the Olympic Games as an additional distraction. Despite this it has been perceived as a success: the H-share priced at 18.5 times 2008 earnings and, amid roiling markets, it was up more than 10% by September 5.

Structurally, this appears to be the way A- and H-share combinations will be managed for the foreseeable future, rather than the truly simultaneous offer approach taken by ICBC and others. One problem with the simultaneous model – something that came up with Citic Bank’s IPO – was that the CSRC typically asks institutional investors for guidance on what the price of the A share launch should be, and uses the responses to help calculate the launch price. Consequently, institutions naturally tend to suggest low prices, meaning the A-share starts low and climbs steeply. If the H share is obliged to match that price, it leaves a lot on the table. Holding the H share launch three days later at a similar or higher price to the A-share gives more freedom, although it doesn’t necessarily make life easier for the H-share bookrunners, who have a greater set of constraints on them around pricing and regulation than they otherwise would.

RELIANCE PETROLEUM

These are hard times for emerging markets borrowers, but there are always exceptions. And they don’t get any more exceptional than the Reliance group.

The US$500 million loan raised by Reliance Petroleum, signed in April, is illustrative of the group’s appeal. In the middle of a global credit crunch, RP successfully borrowed a seven-year loan with no less than 19 banks at the MLA level – a sharp illustration of its popularity. “The biggest reason [for taking part] was the profile of the deal,” says Tajinder Singh Setia at ABN Amro in India, one of the 19 banks. “The fact that it was from the Reliance group ensured wider participation.”

The loan will finance the second phase of a 580,000 barrel a day refinery in Jamnagar, Gujarat. It follows a US$2 billion hybrid corporate and project finance loan signed in October 2006 which financed the first phase. The latest deal was effectively an extension of the first, with an average life of six years, and what Setia calls a “plain” structure. It paid 155 basis points over Libor, which he describes as “very competitive in this environment.”

Initially six banks were mandated on the financing: Banc of America Securities Asia, Bank of Tokyo-Mitsubishi UFJ, HSBC, Mizuho Corporate Finance, Sumitomo Mitsui Banking and West LB. It is understood that a signing among those six took place on March 19, and that RP had been keen to do so before March 31 because of India’s external commercial borrowing guidelines. In any fiscal year (in this case running from April 1 to March 31) an Indian company can seek approval from the Reserve Bank of India to borrow up to US$500 million in offshore funds. Sealing that approval before March 31 freed up the company to borrow that amount again from the offshore markets in the new fiscal year if necessary, perhaps to refinance existing deals in brighter market conditions.

However it was after March 31 that the broader banking group – by now adding ABN Amro, Arab Bank, Banco Bilbao Vizcaya Argentaria, Bank of Nova Scotia, Calyon, Credit Industriel et Commercial, DnB NORBank, KBC Bank, KfW, Natixis, NordLB, SG and Standard Chartered – came in to the deal, signing in Beijing on April 28. With all of those in, there has been no need to go to general syndication.

On first sight the absence of American houses bar Banc of America is striking, although Setia says the lenders don’t look dramatically different to the way they would have done before the credit crunch. “I wouldn’t say the banks are significantly different, it’s just the participation of banks has been widened,” he says. This naturally reflects banks wishing to spread risk.

While the scale of the lending group looks unwieldy, it is not uncommon, as was illustrated by a deal from another part of the Reliance Group, Reliance Industries, when it launched a US$1.2 billion five-year bullet loan in July with 19 banks in its arranger group and, by late August, 24 banks in total. “In the space of three months they have raised $1.7 billion,” says Setia. “That’s a significant achievement given the credit conditions. It’s unlikely many borrowers could do that in this market, as is evidenced by the number of deals from the Indian corporate sector. There’s been just a handful of deals in the last six to eight months.”

There’s likely to be still more. Market talk is of a $2 billion reserve-based lending deal, which is a project finance facility backed by Reliance’s known oil reserves. Also, Reliance Petroleum itself will at some stage refinance both of its loans ahead of step-up margins from the original financing coming into effect.  

The plant being financed by the RP loan is expected to be a groundbreaking facility. It will be able to convert heavy crude oil into fuels sufficiently clean to be sold in jurisdictions worldwide, which should increase gross refining margins. As a general rule, so-called sweet (or light) crude is easier and cheaper to refine than sour (heavy) crude, but the fact that far fewer petroleum companies can convert sour crude to a level that meets strict western standards gives them pricing power. It is also ahead of schedule: it was originally slated for project completion by the end of December but is likely to be ready at least two months earlier.

TATA GROUP

If this is the sort of market that scares borrowers away, nobody told the Tata Group. Across its disparate businesses – motors, chemicals, power – it has been active both in syndicated lending and debt capital markets, at times seeming as if it is keeping the markets moving almost on its own.

Tata has been active chiefly because of the acquisitive nature of its group companies. No group more than Tata illustrates the trend for Indian companies to acquire businesses overseas, and each of them has required funding. The hardest part has perhaps been to keep these raisings from competing with one another.

Tata Motors, for example, has been busy putting together the funding for its US$2.3 billion acquisition of Jaguar and Land Rover from Ford. In June it closed a US$3 billion bridge loan, under eight original MLAs: Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Citi, ING Bank, JP Morgan, Mizuho Corporate Bank, Standard Chartered and State Bank of India. All told a further 15 banks later came in to the deal.

Refinancing that bridge has created one of the most interesting stories in the Indian capital markets this year, with Tata Motors originally setting out to raise Rs72 billion through a rights issue, made up of three different components:  a straight issue of ordinary shares, another of convertible preference shares, and a third of differential voting rights shares, which carry only one tenth of the voting rights of the ordinary shares. The proposed deal, through JM Financial and ICICI Securities, has proved highly controversial because of the vast dilution and the fact that the differential voting right shares have never been attempted in India before, but at the time of writing pricing was expected to be established any day. The planned Rs30 billion convertible preference issue, though, was scrapped in August; instead that part of the cash will come from monetising some investments, likely through inter-group sales.

Elsewhere, Tata Chemicals has been active, seeking financing for its US$1.1 billion buyout of General Chemical Industrial Products, a US company. A US$850 million acquisition financing includes a US$350 million bridge loan, which has not gone into general syndication; and a US$500 million 75-month term loan. This loan, launched into general syndication in April, was mandated to ABN Amro, Calyon, HSBC, Mizuho Corporate Bank, Rabobank, Scotiabank and Standard Chartered. Since then commitments have come in from ANZ, Aozora Bank and Intesa Sanpaolo. In a sign of the company’s strength, it was believed in early September that this deal would be completed without market flex being applied to the terms.

Then there’s Tata Steel, which in May became the first private Indian company to issue unsecured domestic debt of significance, with a Rs20 billion bond sole led by Citi. Originally planned as a Rs7.5 billion raising, the deal attracted about 20 investors, mainly mutual funds and private insurance companies. Getting the deal away unsecured left assets available as collateral for further borrowings if required. This one involved three tranches, of seven years, three year fixed and three year floating.

Finally, Tata Power allocated a US$950 million financing in April to fund its acquisition of a 30% stake in each of Kaltim Prima Coal and Arutim Indonesia from Bumi Resources. This included a recourse and non-recourse tranche; the US$350 million recourse tranche had an average life of 6.5 years, and the non-recourse section, with nine mandated leads, an average life of 4.1 years.

Tata Power then completed a Rs5 billion 10-year bond in April, fully secured and underwritten by Standard Chartered. It needs capital to almost quintuple its power generation capacity by 2012, and won a bid to set up a 4000MW power plant in Gujarat, a Rs200 billion project.

For the future, Tata Steel Global is believed to have been working on a private placement worth between US$500 million and US$1 billion. The company has even been linked with a London listing. Tata Sons, the investment holding company of the Tata group, is understood to be considering a Rs5 billion bond, although plans have been put on hold by rising Indian bond yields.

It’s unsurprising, given its activity, that the group is moving into investment banking and private equity; Tata Capital, floated last year, has been hiring heavily from groups including CLSA and Centurion Bank of Punjab. It has a memorandum of understanding with Mitsubishi UFJ to cooperate in cross-border investment banking including global offerings of Indian equities. The Tata Group itself is likely to be a big part of the client base, particularly at first, although the Securities and Exchange Board of India (SEBI) dictates that Tata Group deals will have to be done in combination with other independent advisors, not sole led by Tata Capital.

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