Dealtalk: Record India M&A financing stretches reach and debt
MUMBAI (Reuters) - Bolstered by banks offering record amounts of loans for takeovers, Indian companies are taking on grand plans and greater risk amid heavy supply demand and a shaky economic picture.
Midway through 2011, M&A financing volumes, completed and pipeline, are already nearly 30 percent larger than the previous record set for an entire year.
The availability of these loans is allowing home grown, mid-sized companies such as GVK Power & Infrastructure (GVKP.NS) and Adani Enterprises (ADEL.NS) to expand operations overseas.
GVK, for example, is in the process of negotiating a deal to buy two Australian coal mines, sources have previously told Reuters, the price of which may exceed more than twice its own market value.
Such bold moves are possible with financing at the cheapest it's been since the 2008 financial crisis.
But along with this expansion comes concerns that the pressure to grow supply may overstretch the companies and burden them with debt payments in the future.
"I think there is a lot of acquisition financing happening right now and these loans can be a risky business," said a top banker at a foreign bank in Mumbai, declining to be identified.
"Some companies in particular have to be careful when taking on these loans," he said.
Year to date, acquisition financing volumes total $11.62 billion, according to Thomson Reuters Loan Pricing Corp, including uncompleted offers. That's well above last years total of $9 billion and the 2007 record of $9.2 billion.
Natural resources drove a third of outbound India M&A last year, and has already surpassed that proportion this year.
The pipeline includes port operator Mundra Port's MPSE.NS $2 billion loan to buy Australia's Abbot Point Coal Terminal.
Standard Chartered is one of the most aggressive M&A lenders in India, Asia's third-largest economy. The bank is bringing in half of the $2-billion loan Mundra Port is raising. Top Indian lender State Bank of India (SBI.NS) will lend the remaining.
"They are able to pursue certain sizes because debt is available," said V. Anantharaman, co-head for wholesale banking at Standard Chartered in India, referring to India's midsized companies. "The banking system has the comfort around the ability of these companies to ultimately repay the loans."
Feeding the loan frenzy is the need for these companies, with little cash on hand, to expand in a market where supply is short, while demand and prices are rising.
Surging iron ore and coking coal prices have pushed Indian steelmakers to seek mines in Africa, Australia and Canada.
"There is huge pressure on Indian power companies to get certainty in terms of coal prices. The only certainty they have is to get access to imported coal," said Arvind Mahajan, executive director at KPMG Advisory.
Fast growing Lanco Infratech currently has nearly 6,000 megawatts of power projects under construction, at a cost of $7.2 billion. The investments have seen its debt-equity ratio grow to 4.6 times in March 2011 from 3.6 times in last June. In March this year, it acquired Australia's Griffin Coal for $760 million, funding most of the deal through a three-year loan.
Lanco officials did not respond to queries seeking comment.
Mundra Port and Special Economic Zone, part of India's diversified Adani Group, currently has a comfortable position in terms of debt and interest ratios, but could face pressure when its financials feel the impact of its $2 billion purchase of the Abbott Port coal terminal in Australia in June this year, an acquisition it funded almost entirely out of short-term debt.
Mundra did not immediately reply to a call seeking comment.
GVK Power's pursuit of two coal mines from Australia's Hancock Prospecting for about $1.3 billion is nearly double its own market capitalization.
The company, which constructs power plants and airports, is expected to tap India's No.2 lender ICICI Bank (ICBK.NS), Standard Chartered and state-run Bank of Baroda (BOB.NS) to finance the deal, sources have told Reuters.
The deadline for the deal has been extended until end-August as the companies grapple over pricing. A GVK spokesman said the company would not comment on the deal at this stage.
"The need for supplies is well understood but the size of acquisitions they are doing compared to their own sizes is really daring," said a M&A banker with a foreign investment bank, referring to the industry in general.
GVK may have to arrange $6 billion to $7 billion over a period of five to six years in working capital, infrastructure building and other investments if it buys the mines from Hancock, sources have earlier said.
"A sharp global economic slowdown or regulatory changes surrounding the natural resources are just some of the risks that can throw calculations of Indian entrepreneurs off-track and create problems in repaying debt," said the M&A banker.
Some bankers, however, said the companies taking the debt burden for overseas acquisitions have solid balance sheets and business prospects. Some of them may be able to hit the capital markets again to pay off some of the loans.
"The mindset of most corporates toward leverage today tends to be more prudent," Sameer Nath, head of M&A at Citigroup (C.N) India. "Banks are also more cautious and both sides are more focused on capital structures sustainable over the longer term."