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Wednesday, 16 January 2019

High-Yield Bond

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The US$300m refinancing for the private equity owners of India’s Hexaware Technologies proved that the bond market can offer competitive financing through a holding company structure even for an emerging markets investment.

The July 7 debut for HT Global IT Solutions Holding established a template for other private equity investors looking to optimise their Indian holdings, while offering high-yield fund managers some welcome exposure to a sector that rarely issues bonds on a standalone basis.

Baring Private Equity Asia owns a 71% stake in India-listed IT solutions provider Hexaware Technologies through a Mauritius-based holding company called HT Global.

Before the deal, HT Global had been using dividends from Hexaware to pay off an amortising loan it used to acquire the stake three years earlier. With US$235.2m outstanding as of March, the repayments were weighing on the company.

To solve the problem, global coordinators Deutsche Bank and Standard Chartered came up with a more efficient refinancing through a five-year non-call two senior bond, replacing an amortising loan with a bullet maturity. ING and UBS also joined as bookrunners.

First, the leads won a Ba3/BB–/BB– rating for HT Global, making it one of the only private equity-owned entities in Asia to obtain a Double B rating from all three rating agencies.

Then, through careful structuring, bankers were able to convince bond investors to look beyond the structural subordination and to give Baring the flexibility to sell part of its stake without affecting the terms of the bonds.

Foreign institutions have often used Mauritius vehicles to invest in Indian equities for tax purposes.

To ease investors’ concerns, HT Global offered covenants including an interest reserve account, which will hold two years of coupon payments initially, and additional collateral.

Most importantly, bondholders were also given the comfort that they would not be disadvantaged should HT Global reduce its stake in Hexaware.

The deal allowed the stake to fall as low as 50.1%, but included a requirement that HT Global deposit the proceeds from any stake sale in a collateral account favouring bondholders. Before it can pay out a dividend, the issuer must redeem a third of the bonds and meet other requirements such as a leverage test.

Volatile markets after the UK’s Brexit vote and any worries over India’s economic growth took a back seat, as HT Global priced the bonds to yield 7.125%, tightened from guidance of 7.625% area after investors submitted US$2bn of orders.

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