India high-yield first analysed

Author: Ashley Lee | Published: 11 Jun 2013
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Rolta is considered the first true high-yield credit from an Indian corporate;

While Indian conglomerates such as Reliance and Tata Steel have been active in the debt markets, they have not needed to negotiate extensive high-yield covenant packages because they are well-known names in the market;

The bonds, issued by a special purpose vehicle of Rolta’s US subsidiary, required a two-layer guarantee from both the parent company and its three largest subsidiaries;

Only days after Rolta issued its bond, London-listed Vedanta followed with a $1.7 billion high-yield offering - its first US dollar-denominated bond in two years and the largest-ever corporate high-yield bond from Asia.

Rolta’s high-yield bond has been described as the first true Indian corporate credit in the high-yield market. Although some have debated this designation, copycat deals may follow.

Large Indian corporates have previously tapped international debt capital markets but few are considered true high-yield credits. Tata Steel and its subsidiaries recently issued several unrated bonds, for example. However, the Tata brand is very well known within the investor community. Other deals, such as Suzlon’s offering backed by the State Bank of India’s standby letter of credit, involved credit enhancement structures.

This deal provides a framework for India's small and mid-cap corporates to finance in the US dollar-denominated bond market.

Although other Indian corporates have issued high-yield bonds, they have been big names such as Reliance and Tata, or have otherwise had government ownership, said Stephen Peepels, head of DLA Piper’s US capital markets practice in Asia.

"None of these companies went through the process of creating a fully-developed set of covenants to match up with international high-yield precedent and market the deal as a true Indian high-yield debt offering," he said.

The deal

Rolta is an IT sector company, headquartered in Mumbai.

Rolta LLC, a special purpose vehicle of Rolta’s US subsidiary, sold $200 million of notes due 2018 with a coupon of 10.75% under Regulation S and Rule 144A. The offering was two times oversubscribed, and was rated BB- by Standard & Poor’s and BB- (EXP) by Fitch.

A press release noted that there was demand by over 70 accounts globally, with Asia contributing 47% of the demand and the US 43%.

A source close to the transaction said that other deals, such as Vedanta and Rain Calcining, involved Indian entities. But most of those businesses' earnings before interest, taxes, depreciation and amortisation (Ebitda) and assets were outside of India. Conversely, Rolta generates a substantial part of its cash flow from India.

Peepels added that Rolta is a purely Indian corporate, but does business internationally in 30 to 40 countries with subsidiaries in the US, UK and Middle East.

"To make the transaction tax efficient, the bonds were issued by a US special purpose vehicle (SPV) created by the company’s US subsidiary," he said.

Srinivas Parthasarathy, head of Trilegal’s capital markets practice, explained that there were extremely high levels of diligence in this transaction not only because it was a 144A offering, but because of the complex nature of the company’s business.

Guarantees

Another source close to the deal told IFLR that the most challenging aspect of the deal was negotiating the guarantees.

The source said that although the issuing entity was a US entity, the credit had to be sold on the Indian parent’s creditworthiness, so a guarantee by the Indian parentco was required.

Given the significant Reserve Bank of India limitations on guarantees of offshore indebtedness by Indian entities, intricate terms had to be created to enable the parent guarantee to comply with Indian regulations and corroborate the marketing value of the parent guarantee.

Further, Peepels explained that the company received preliminary feedback that from a bondholder protection standpoint, more security would be beneficial to a successful transaction.

"While the parent company in India was always going to guarantee the bonds, we also put in place subsidiary guarantees by each of Rolta’s three largest subsidiaries, which resulted in a two-level guarantee structure," he added.

Covenants

As there were no comparable Indian corporate credits, negotiating covenants also proved challenging.

Rolta is headquartered in India, but about 40% of its revenue is from the US. Deal counsel discussions around the covenants reflected that, Peepels said.

"Although this was an Indian company and a debut issuer, the issuer would not accept a covenant package that was overly restrictive or failed to consider its strong corporate governance," he said.

Given the high-growth nature of businesses in the IT sector, the covenant package for this issuance required even greater customisation to provide sufficient flexibility to capacitate growth over the five-year life of the bonds, while also being mindful of bondholders’ considerations.

Intercompany loan documentation

Rolta issued bonds in order to use the proceeds to pay down some of its more expensive debt obligations. Bond proceeds were delivered to the issuer, who then loaned these funds to its various operating companies to repay their debts.

"We helped to create intercompany loan documentation to ensure that the funds into Rolta LLC were properly secured as they went from the LLC to the subsidiaries," Peepels said.

What's next?

Deal counsel expect Indian corporates to issue more high-yield bonds. But only corporates with strong offshore subsidiaries will be able to participate in this market, given coupon restrictions.

Parthasarathy said there were several Indian corporates with substantial overseas legal entities and operations that would be looking to tap opportunities in this space as the market opens up.

Peepels agreed. He noted too, that the opening of this market created an opportunity for investors to more closely examine Indian high-yield debt. That in turn could open the door to high-yield credits from other great Indian technology companies or companies in another sector with a similarly positive story, he said.

But other market participants were less optimistic about the future of India high-yield bonds.

AZB’s Varoon Chandra warned that the few Indiaco transactions in which overseas companies had issued parent-guaranteed bonds had opened up interest in the market, but had not prompted many copycat deals.

 "The answer as to why we’re not seeing more of these deals is probably more due to commercial concerns rather than regulatory ones, with covenant packages not easy to finalise," he added.

Tear sheet

The issuer’s SGX disclosure can be found at the following link: http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_61550AB987A93FCF48257B72002E9611/$file/rolta.pdf?openelement

The issuer was represented by DLA Piper as US counsel and AZB as India counsel.

Barclays, Citigroup, DBS and Deutsche Bank were the joint lead managers, and were represented by Davis Polk in relation to US law. Trilegal was their India law counsel.

Related links

India credit enhancement first analysed http://www.iflr.com/Article/3184619/India-credit-enhancement-first-analysed-updated.html

India DCM: infrastructure bonds set to bolster markets http://www.iflr.com/Article/3146124/India-DCM-infrastructure-bonds-set-to-bolster-market.html

RBI limiting success of Indian infrastructure debt funds http://www.iflr.com/Article/3127469/RBI-limiting-success-of-Indian-infrastructure-debt-funds.html