Subprime may not upset Indian M&As

The subprime crisis, which is now playing out in the West, may not quite be a dampener for Indian corporates, a growing number of whom are aggressively scouting for acquisitions abroad, according to senior bankers.

These bankers reckon that the level of mergers and acquisitions (M&As) activity could be higher in the near term, with Indian corporates sensing opportunities in the US and Europe. The assessment comes at a time, when India Inc has started making an impact in the M&As segment in Asia. M&A volumes from India, which were in single-digit figure at 6% of the total volumes in Asia in 2005, have more than doubled to 15% in 2006.

Indian companies are unlikely to be impacted by the turmoil in the subprime market, bankers said. However, credit spreads for Indian corporates, which have expanded by at least 50-60 basis points during the past two months, are unlikely to narrow down soon.

According to Lehman Brothers MD India investment banking Nalin Nayyar, equity levels in transactions will go up from 15% earlier to 25-30%. There is a discernible flight to quality now, he said. Indian corporates will see value-based opportunities in the next 3-6 months, he felt, adding that sponsors would return to the M&A market for smaller transactions. He also foresees higher funding costs, lower leverage levels and large equity components. He expects an equilibrium to be established in the medium term.

He told participants of a seminar organised by Ficci and IBA that due to the high liquidity in the markets, corporates used to leverage transactions in some cases as high as 10 times. Mr Nayyar said that in some cases, banks have started providing loans without any covenants attached. The acquisition finance market growth hinges on liquidity provided by structured finance vehicles like collateralised loan obligation. In 2002, the volumes of the acquisition by the finance market were at euro 41 billion, while the CLO volumes were at euro 3 billion.

Banks were the primary funding source at 81% and the remaining being institutions. In 2007, the volumes reached euro 138 billion while CLO volumes were at euro 25 billion. The market now has over 31 hedge funds now compared with none in 2002. The composition of the market has also changed, with banks accounting for 45%, CLOs 34%, credit funds 15% and others 6%, respectively.

According to Citigroup Global merger and acquisition director Devinjit Singh, the M&A segment in India has acquired a significant size. The volumes from India in 2006 have doubled compared with the previous year. The theme of outbound acquisitions has also gone up drastically. As against $4.4 billion in 2005, they rose to $24.46 billion in 2006. This year, it has topped $20.59 billion. India beat most countries in Asia, including China, in 2006 on the M&A volumes. The only country, which had a higher percentage of volumes in 2006, was Australia at 28%.


According to SBI capital markets MD and CEO R Sridharan, close to 57% of the outbound deals were in Europe, while 34% were in North America. There have also been instances of small Indian companies acquiring larger overseas companies. A case in point is that of Rain Calicining with a market cap of $125 million acquiring US-based CII for $595 million.

According to HSBC India head corporate, investment banking and markets Tarun Kataria, over the past 2-3 years, there has been a tightening of loan and credit default swap (CDS) spreads. However, over the past two months, spreads have risen by 50-80 basis points. Spreads for Indian corporate papers with a five-year tenure have gone up from Libor plus 65 basis points close to Libor plus 100-110 bps. Financing for Indian corporates would not dry up, but pricing would be higher than what it was years ago, he feels.


Mr Nayyar adds that currently the market is focused on liquidating the existing underwritten leveraged loan pipeline — $200 billion in the US and $125 billion in Europe. Some of the deals have been pulled completely or are being restructured. The secondary market has virtually collapsed there.

Many Indian companies have leveraged financing options for bigger deals. They have also used the SPV route, as they do not have to pay withholding tax and also as they are not burdened with restrictions on interest rates, amounts, tenures and the use of proceeds, according to Mr Singh.

(source: Economic Times)