Buyout financing gets a boost amid low interest rates

PE firms use debt in addition to equity capital to make large acquisitions, reducing their overall cost of capital and improving their potential returns while also allowing them to make larger acquisitions.

Mint It was reported earlier this month that Carlyle is looking to raise up to $1 billion in debt financing to fund its takeover bid of Hexaware Technologies, while in June Blackstone raised a similar amount to acquire Mphasys Ltd. .

“Between November and March, there was a lot of demand for acquisition financing in the unlisted space as listed valuations increased substantially, valuation expectations on the unlisted side were still reasonable. But, after March, this changed, and even on the unlisted side, promoters started demanding valuation multiples at par with the listed peers,” said Shantanu Sahay, managing director and head of loans, Nomura. he said.

According to Sahai, this trend has resulted in a significant change in the debt market.

“While earlier acquisition financing was underwritten by banks like ours and placed at C in Taiwan, EMEA, Australian and Southeast Asian banks. Now, these higher levels of leverage, along with the additional flexibility demanded by sponsors (PE funds) Coupled with factors such as incremental covenant headroom, cash flow deferral, high operating leverage headroom and high subjectivity make commercial banks unable or unwilling to subscribe to this paper. Risk/investment policies. Hence, the entire universe of sales of such loans Credit from commercial banks has shifted to fund and other institutional investor participants,” he said.

Sahai said this is a new product on the block called “Unitrench”, and currently, very few banks are meeting this need of the market.

“While on the face of it, this looks like a product that is a bit different from a normal acquisition and leveraged finance product, in the sense that maybe the leverage is a bit higher, covenants are looser, yields are higher, tenure is longer, etc., But the result is a product that is not capable of being sold in the commercial bank space. So a new investor base is needed to sell it.”

He said this is an institutionalization of acquisitions and leveraged finance space which has happened extensively in the last three to four months and is a first in India.

Nomura expects the need for acquisition financing to increase strongly over the next 12-18 months due to more capital-intensive financial sponsors in the country as well as consolidation themes across sectors.

In line with the increasing buying activity in the Indian market, the Japanese bank plans to aggressively grow its lending business in India.

“We have done six deals in the last one quarter, and we have a pipeline of about 17 more deals for this year. We are planning to double our balance sheet in the next 12-18 months,” Sahai said.

“Our balance sheet deployment and revenue CAGR over the last five years is over 100%. And notwithstanding this aggressive increase, the total cumulative offence, which either delays or lapses throughout this period, is nil.”