Wednesday, 26 June 2019

Domestic Bond

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Nirma’s Rs40bn (US$600m) rupee benchmark stood out in Asia’s local currency markets in 2016 as a watershed moment in Indian acquisition financing.

The household products group turned to the bond market to finance the US$1.4bn acquisition of the Indian unit of Swiss cement company LafargeHolcim, and in the process opened a new avenue for high-rated companies to fund major acquisitions.

Nirma’s four-tranche deal was the largest acquisition-related bond in the Indian market, and a landmark in the central bank’s drive to wean corporate borrowers off bank borrowing.

The size and pricing led a banker away from the deal to call the transaction a “paradigm shift” for corporate financing.

Nirma priced the four-tranche offering at an average yield of 8.68% for tenors of two, three, four and five years.

Indian companies are not able to draw on bank loans to fund 100% equity acquisitions, and funding from a non-banking finance company would have proved costly as Nirma would have to pay 11%–12% interest.

Instead, the average coupon across the four tranches was an estimated 250bp lower than a loan from an NBFC, underlining the benefits of issuing a bond.

Barclays, Credit Suisse and IDFC managed the deal. They were able to achieve an acceptable rating for Nirma’s bonds by creating a special purpose acquisition vehicle called Nirchem Cement, which is to be merged with Lafarge India in 12 months.

The bonds, rated AA by Crisil, were issued by Nirchem Cement with no recourse to the parent company (Nirma). Interest payments will be serviced using the cashflows of the target company, Lafarge India.

Thanks to the strong rating, there was huge interest from a wide range of investors, and the bonds were oversubscribed more than 1.6 times.

Some of India’s largest mutual funds lapped up the bonds, seeing the deal as offering an attractive yield in a falling interest rate environment, and have been well rewarded for their confidence as the bonds performed well in secondary.

Investors also took comfort from improvement in Nirma’s fundamentals from the Lafarge merger. The acquisition will expand Nirma’s cement manufacturing presence in northern and eastern India and help it benefit from planned development projects.

In a year when regulators redoubled their efforts to deepen the rupee bond market, both onshore and offshore, Nirma’s M&A benchmark stood out as a demand-driven solution to a corporate finance conundrum. Free from the interference of politics or currency arbitrage, the groundbreaking financing set the standard for innovation in Asia’s local markets.

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