Household products manufacturer Nirma has raised Rs 4,000 crore ($600 million) to fund the acquisition of Lafarge India, in the largest M&A bond in the local market.
The four-tranche rupee offering was priced at annualised yields of 8.55 per cent, 8.65 per cent, 8.75 per cent and 8.85 per cent for tenors of two, three, four and five years, all in a separately transferable redeemable principal part (STRPP) format.
Investors bid for Rs 8,000 crore, showing that the rupee bond market is more than capable of supporting major acquisition financings.
One investment banker, who was not on the deal, called it a "paradigm shift” for corporate financing.
“Companies can now tap the bond market to fund acquisitions. That is what is done in the mature markets,” he said.
Gaurav Pradhan, co-head of investment banking capital markets for India at Credit Suisse, shared a similar view.
“Local markets will become more mature to non-recourse transactions. We may see more leverage-funded buyouts from India with local financing from the debt market.”
Nirma agreed to buy the Indian unit of Swiss cement company LafargeHolcim in July for an enterprise value of $1.4 billion.
Nirma had limited options to fund the acquisition, since banks are not allowed to lend money to a company that is buying 100 per cent of the equity in another company. Nirma could raise equity, borrow from a non-bank lender or issue bonds through a special purpose vehicle.
The bond market proved the cheapest option, offering a coupon 250 bps lower than a loan from a non-banking financial company. The yields on AA rated five-year corporate bonds are hovering around 7.98 per cent.
NBFCs charge a minimum of 11.5-12.0 per cent for loans to a AA borrower and typically offer only small deal sizes, said bankers.
Nirchem Cement, the SPV issuer, came with a AA rating from Crisil with a negative outlook.
Investors lapped up the decent returns on Nirma's offering.
“Mutual funds have subscribed to Nirma's bond issue because yields are fairly attractive for a shorter maturity bond issued by a manufacturing entity. This is against the backdrop of declining bond yields over the last few months,” said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management.
“Mutual funds are flush with liquidity, enabling adequate investor interest from a diversification perspective as well," he said.
Acquisitions are rarely financed through the bond market, though Tata Power's Rs 3,500 crore 7.7 per cent three-year offering in July was said to be linked to the purchase of Welspun Renewable Energy.
Globally, rates are low and companies are taking advantage of lower yields to fund acquisitions.
Bankers are hoping that Indian companies will follow the same route since a slew of reforms were unveiled by the Reserve Bank of India to deepen the bond market and encourage alternate sources of funding.
“There will be more supply in the coming days, which will improve liquidity and depth over time. Companies could then tap the bond markets more often for both general corporate purposes or to fund acquisitions,” said Radhakrishnan.
Credit Suisse, IDFC and Barclays were arrangers for the Nirma deal.