Having struggled for years to access international capital, the Indian telco’s US$800m institutional share sale underlined the growing confidence in the group’s prospects under Narendra Modi’s pro-business government.
Source: REUTERS/K.K. Arora
Indian telecom group Reliance Communications has been through the ringer in recent years, having faced intense competition, high leverage and a scandal surrounding 2G licences that led to the arrest of several executives and the questioning of its owner.
Financing has been a struggle. The company pulled a Singapore trust listing for its undersea cable unit, GTI Trust, in 2012, having attempted to raise up to US$1bn at a double-digit yield.
It has also fallen out of favour with many international lenders, and turned to a group of state-owned Chinese banks to refinance a US$1.2bn convertible bond in early 2012. Earlier attempts to sell telecom infrastructure and an international unit also fell through.
An equity raising was crucial to RComm’s ability to refinance its debts, but, when the company first approached bankers in late 2013, the outlook was bleak. The stock was facing sell recommendations across the street, and soft sounding for a US$200m–$400m equity offering at investor meetings in early 2014 fell flat.
“Given past feedback, we decided to tap existing large investors that understand the company better than all others.”
The mood at the time was decidedly negative towards the scandal-hit sector and investors were nervous about the looming elections.
That all changed after Narendra Modi’s landslide victory in May, and RComm and its advisers spotted an opportunity to try again.
Bankers floated the idea with a major US-based existing investor that agreed to invest only if the offering raised a meaningful amount of new equity to deleverage the company, and if RComm’s controlling shareholders also put up some of their own money.
“Given past feedback, we decided to tap existing large investors that understand the company better than all others,” said a banker close to the deal. “There was a concern that a small equity raising wouldn’t make much of a difference to the company’s leverage, while a US$1bn target would do a lot.”
RComm’s management settled on a parallel issue of warrants and preferential shares to the controlling Anil Dirubhai Ambani Group, and the anchor investor agreed to match the near US$217m preferential allotment.
Other investors, including a Canadian pension manager and US mutual funds, signed up as anchors, and nearly 60% of the deal was covered with such orders before launch.
RComm announced the preferential share allotment before the launch of the qualified institutional placement, which helped build momentum for the share sale as it was seen a sign of the promoters’ confidence in the company.
The terms of the preferential allotment were tweaked to reinforce that confidence further. Under Securities and Exchange Board of India rules, only 25% of the preferential tranche needed to be settled immediately, and the remaining 75% could be made in 18 months. RComm’s promoters agreed to put in 50% upfront and pledge the rest come March 2015, well inside the 18 months allowed.
RComm’s offer price of Rs142.14 was at the maximum 5% discount to the floor price of Rs149.61, and a 6.1% discount to last Tuesday’s close. The stock closed 0.1% higher at Rs151.45 the next day, after the placement. Under Indian rules, companies can offer a discount of no more than 5% on the floor price.
Four long-only institutions from the US and the Middle East received chunky allocations, equivalent to more than half of the base deal. Around 60% of the book went to long-only institutions, and 40% to local institutions and hedge funds. More than 50 accounts participated in the transaction, which was covered within an hour of launch, but only 40 received allocations.
Alongside the QIP, the company also issued to the promoters at Rs150 each 86.7m warrants, which can be converted into shares for Rs13bn, or US$217m.
The QIP was the largest such sale in the Indian equity market. It helped the company to deleverage to 1.6x from 2.5x.
CLSA and JP Morgan were the global co-ordinators and bookrunning lead managers while Axis Bank, Edelweiss and Macquarie were the co-bookrunning lead managers.
The placement lifted confidence among RComm’s creditors, helping it to proceed with other financing initiatives.
Data cable subsidiary Global Cloud Xchange, formerly known as Reliance Globalcom, raised US$350m in August from an inaugural sale of five-year non-call two high-yield bonds, priced to yield 7%. The 144A/Reg S senior secured bond, rated B2/BB+ (Moody’s/Fitch), garnered orders of over US$1.8bn from 150 accounts.
RComm is also talking to bankers for a debut US dollar bond of about US$400m and a tenor of five years. Proceeds will be used to settle external commercial borrowings with some Chinese banks, freeing up some of its assets and giving the company greater operating flexibility.
However, it has not all been smooth sailing for RComm’s investors. Having initially held up well, the stock was down 20% two weeks later and trading 34% lower at the time of writing.
RComm is now seeking shareholder approval to sell up to 25% of its capital in a further QIP. Based on the company’s current market cap, the maximum size of this deal will be Rs71bn.
RComm is also looking to refinance its existing Rs67bn of short-term rupee loans with long-term facilities after the government gives permission to use its telecom licence as collateral for the local offering, sources say.
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