August 27, 2013 / 3:00 PM / 4 years ago

RLPC: Cooper Tire acq. threatened by falling rupee, workers strike

NEW YORK, Aug 27 (Reuters) - An emerging market one-two punch threatens to derail a $2.5 billion debt financing package backing the acquisition of U.S.-based Cooper Tire & Rubber Co by India’s Apollo Tyres Ltd, sources told Thomson Reuters LPC.

The Cooper acquisition, which would make Apollo the world’s seventh-largest tire maker, could be stumbling amid India’s declining currency and a workers’ strike in China, according to banking sources.

“There are a lot of issues, Chinese issues, Indian rupee issues,” a loan investor said. “If you are a credit investor you’d probably be worried about buying the debt.”

India’s ailing currency is a concern, investors said. Amid fears that the amount of cash flowing into world markets from the U.S will tighten, emerging markets’ currencies have suffered of late.

The Indian rupee has lost almost 15 percent of its value against the U.S. dollar since June 12 when the Cooper acquisition was first announced.

An ongoing employee strike at Cooper constitutes another hurdle, according to investors.

A group of 5,000 workers of Cooper Chengshan (Shandong), a Cooper Tire joint venture with China’s Chengshan Group in Rongcheng City, went on strike on June 21 to oppose the deal. The union, via a paid advertisement in the Wall Street Journal, recently said the interests of the employees will be significantly damaged by a merger with Apollo.

“Apollo is confident that the issues Cooper is addressing with its facility in Rongcheng, China will be resolved,” a spokesman for Apollo said in an email. “Apollo is committed to successfully completing this compelling strategic transaction with Cooper, which remains on track.”

Backing the Cooper Tire acquisition is $2.5 billion in new debt at the Cooper level. The amount includes $450 million in recourse loans at the Apollo level and $1.8 billion of non-recourse at the Cooper level.

Around $1.8 billion of the non-recourse portion of the financing is likely to come from a bond fundraising, while another $300 million will be through an asset-based lending (ABL) facility.

The financing is scheduled to launch to syndication as early as September.

Deutsche Bank, Goldman Sachs, Morgan Stanley and Standard Chartered Bank are joint lead arrangers and joint bookrunners on the Cooper portion, while Standard Chartered is sole underwriter of the $450 million recourse loan on the Apollo side. The recourse borrowing marks Apollo’s debut in the international loan markets.

REGULATORY CHANGES

Apart from these ongoing challenges, the Cooper Tire acquisition could have faced additional regulatory hurdles if the deal had not been announced before August 14.

In an attempt to curb the decline in the Indian rupee, the Reserve Bank of India announced changes to rules relating to overseas direct investments by Indian companies earlier this month that could make it harder for Indian firms to buy foreign companies.

The new rules require an Indian firm to seek approval from the central bank before investing in or extending loans to offshore companies in amounts greater than 100 percent of the acquirer’s net worth. Under previous guidelines, the cap was set at 400 percent.

Yesterday, Apollo said the new rules would not impact the proposed merger because the deal had been announced prior to August 14, when the Reserve Bank’s notification came out.

Cooper Tire representatives did not return calls for comment. Spokespeople for Deutsche Bank, Goldman Sachs, Morgan Stanley and Standard Chartered declined to comment.

On June 12, Apollo and Cooper Tire announced they had entered into a definitive agreement under which Apollo will acquire Cooper Tire in an all-cash transaction valued at $2.5 billion. The combination will create the seventh-largest tire manufacturer in the world.

Cooper Tire’s five-year CDS has widened to 569bp from 261bp prior to the buyout announcement.

Cooper Tire’s stock was trading at $32.32 on Tuesday morning.

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