India escapes subprime turbulence

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Joe Leahy in Mumbai
For some in India, the chills emanating from the sub-prime mortgage market in the US might be a cause for concern.
But Chanda Kochhar, deputy managing director of ICICI Bank, India's largest private financial group, says that she sees it as an opportunity to expand the group's investment banking business.
"There have been some deals in which foreign banks have developed cold feet," Ms Kochhar said. "But we clearly believe that for us this is the right time to be with our clients and to increase our market share."
Underlying Ms Kochhar's confidence is the idea that, while the country's corporates have been active global acquirers this year, they have mostly avoided the sort of highly leveraged transactions now in the spotlight in the US.
Their takeover targets have generally been profitable companies rather than distressed assets. This has meant they have been able to fund their deals largely with bank loans and higher grade credit, helping them to avoid the turbulence presently rattling the US junk bond markets.
The first major test of this theory could come as early as this month. Bankers for India's Tata Steel are expected to revise the terms of a refinancing package for £3.6bn ($7.33bn) of debt related to the Indian group's takeover of Anglo-Dutch steelmaker Corus this year.
While the part of the package they are offering to the bank market is expected to go smoothly, they may have to increase the interest rate or reduce the size or otherwise change the terms of the institutional portion, a seven-year £1.5bn tranche.
"Either they will have to go to the borrower to pay more, or they, the underwriters, will have to take it from their own pockets," said a banker in Mumbai.
Whatever the underwriters decide to do, few believe the deal will run into real trouble.
Like most Indian take-overs, the Tata Steel-Corus deal is not a leveraged take-over in the US sense.
Debt-to-equity on Corus's balance sheet is on a ratio of about one-to-one, far short of the multiples common in such transactions in the US.
Tarun Kataria, head of corporate, investment banking and markets with HSBC India, said: "Indian companies had no history of LBOs in the traditional sense of the term or, for that matter highly leveraged acquisitions, largely because it's a cultural thing."
He added: "For Indian companies to raise high-yield debt on their domestic balance sheets would have likely meant breaching the L+300bps ceiling, which would fall foul of local regulations." This spread was recently reduced to 250bps above Libor.
Manisha Girotra, chairman of UBS in Mumbai, said Indian groups were also mostly buying cash-positive companies with a view to building synergies with their existing businesses.
"By nature, Indian companies are not going into risky targets. If that was the case, then I would say there was a problem," Ms Girotra said.
But rumours abound of some smaller Indian companies being forced to pull deals.
And while the other large deal in the market, the refinancing of part of a bridge loan for Hindalco Industries' $6bn takeover of Novelis, was wrapped up a month ago, others such as liquor maker UB Group's £595m acquisition of Whyte & Mackay are still under way.
Most bankers conceded that while these deals will go through, companies will have to wait longer and pay more than they would a month ago.
"The cost of financing will definitely rise by 100 basis points, or maybe by 250bps, depending on the quality of the name of the target," says Ms Girotra.
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with FE