Now, M&As skid on rate hike street

Corporates to consumers, everybody seems to be feeling the pinch of higher interest rates. In fact, there are those who believe this may prove a hurdle for large M&A deals.

A case in point: Two large IPOs — one that recently got completed and the other, yet to open — which have listed retiring of high-cost debt as a major object of the issue. Interestingly, both the companies owe their high debt levels to recent acquisitions.

Fortis Healthcare, which is tapping the market with a Rs 500-crore offering, will use close to Rs 300 crore for repayment of high-cost debt and repayment. Another Rs 61 crore will go towards repayment of short-term loans. These debts were incurred when Fortis acquired Delhi-based Escorts Heart Institute for a total of Rs 585 crore. JM Morgan Stanley, Citigroup and Kotak are the book running lead managers for the issue.

Another recent IPO — Advanta India — successfully raised Rs 216 crore from investors. The major aim of the issue was to repay a debt of Rs 250 crore owed to one of the promoter group companies. The debt had been incurred to fund the purchase of overseas operating units.

Large M&A deals are mostly debt funded. The recent acquisition of Corus by Tata is an apt case in point. Almost 50% of the purchase price of $12.1 billion is to be raised in the form of debt. Another large ongoing deal in the metals business is the acquisition of Novelis by Hindalco. The total transaction size is $6 billion, while the Aditya Birla group will infuse $3.5 billion into the deal. Of this total, $450 million will be from the group’s treasury while the remainder will be recourse financing, or debt.

Leverage can go even higher, as it has in the case of Chennai-based Aban Offshore. Aban Offshore is an operator of offshore oil drilling rigs and has recently acquired 100% of Sinvest — a Norwegian drilling company for close to $1.3 billion. A report from a leading research house estimates that the gross debt of the company could be $2.4 billion post this transaction on an equity base of $65 million. Suzlon Energy, which is currently bidding for Germany-based wind player RE Power, was also expected to fund the $1.3 billion transaction primarily via debt.

However, since the interest rate hike is largely domestic, large companies that can borrow abroad at lower interest rates may not be affected.

“With instruments like tradeable bonds announced in the Budget this year, interest costs may not prove to be as high for larger corporates. There could also be a push towards consolidation as smaller players find it hard to survive with higher interest costs,” said an industry source.