Unitech taps equity markets to ease leverage

Real estate developer Unitech last night became the first Indian company in more than a year to raise equity through a qualified institutional placement (QIP) when it sold $325 million worth of new shares as part an ongoing effort to reduce its high leverage.

The shares were offered at a fixed price, representing a discount of 10.9% versus yesterday's close, and saw good buying interest from Indian investors as well as support from foreign accounts, despite the company's dire financial position and tough operating environment.

"This is a recapitalisation exercise similar to what we are seeing on a widespread basis in Europe and here in Asia most recently with Shimao Property, and people support that. Effectively this is an opportunity to buy at the bottom of the cycle," says one banker.

Unitech had a net debt-to-equity ratio of 1.7 times at the end of December 2008, which analysts say has resulted in increasing concerns about the company's ability to meet interest and debt repayment obligations. It recently managed to restructure Rs25 billion ($500 million) of debt due for payment in March this year and has announced plans to reduce its overall debt levels from Rs100 billion ($2 billion) through a variety of measures, including asset sales and pre-sales of new projects.

In a report issued earlier this month, analysts at Citi note, however, that further asset sales could prove to be a tough undertaking in the current environment. They also argue that the management's projection of a cash flow of Rs17 billion primarily from the sale of existing inventory and new project launches seems optimistic given "lacklustre residential demand and the fact that customer confidence in Unitech has been dented post its execution track record over the past 12-18 months". As a result, the analysts expect liquidity concerns to continue to weigh on the developer's core business performance in the near term.

Despite the dilution, the addition of new equity should therefore be welcome. And it is a move that the company has been pondering long enough. It initially obtained approval from its shareholders for a share sale in January 2008, but held off because of the volatility in the secondary market and, as the share price kept falling, along with the Indian market as a whole, it soon became literally impossible to do the trade. The reason was that under previous regulations, the floor price for a QIP (effectively a non-marketed placement to a restricted number of institutional investors) was calculated based on the average closing price over the six months prior to the shareholders' approval and as the share price continued to fall, the floor price ended up well above the market price.

Unitech was by no means the only company in this position. In fact, at the beginning of 2008, about 20 or so Indian companies were said to be on non-deal roadshows to drum up support for a subsequent QIP issue. None of those happened and, in fact, India hasn't seen a single QIP since December 2007.

Realising the dilemma, the Securities and Exchange board of India changed the rules in August last year so that the floor price is now calculated based on the closing prices over the two-week period before the company's board of directors decides to launch a QIP, which means the minimum price now corresponds much better to the current market environment.

Unitech's floor price worked out to be Rs38.47 or Rs0.03 below the fixed price at which the shares were offered. Recent leaks to the Indian press suggesting that a sale was imminent had resulted in big share price swings over the past couple of weeks, and the deal was launched on the back of a 10% drop yesterday, although the day before that, the share price was up 15%.

Unitech is still trading 87% below where it was 12 months ago, which makes the recent gains seem rather minute, but the stock has risen 73.8% in the past month from a low of Rs24.85 on March 12, outperforming the 31% increase in the benchmark Sensex index over the same period. The gains have been driven at least in part by signs of a recovery in its core development business as well as by the company's commitment to reduce its debt levels.

The company sold about 421.1 million new shares, which accounted for a sizeable 25.9% of its existing share capital, at a price of Rs38.50. The deal was said to have been multiple times covered, but, in accordance with the QIP regulations, the number of accounts that received allocations were limited to 49. IDFC-SSKI, Morgan Stanley and UBS were joint bookrunners.

H&Q exits another Korean company

Separately, private equity firm H&Q Asia-Pacific followed up the sale of its entire equity stake in a Korea's Hyunjin Materials earlier this week with another exit -- this time from a Hyunjin associate. This sale was smaller in dollar terms, at W46.4 billion ($35 million), but accounted for 22% of the company, which would have made it a bit more of a challenge had the Hyunjin sale not gone so well. But because investors made money straight away on that trade, they were keen to participate in yesterday's transaction as well and, according to a source, there was a lot of buyer overlap for the two deals. In fact, there were some indications that yesterday's transaction was partly triggered by reverse inquiries. UBS acted as sole bookrunner for both trades.

Yesterday's offering consisted of 1.5 million shares in Yonghyun Base Materials, which is about 33% owned by Hyunjin and active in the same line of business, namely metal material forging with a particular focus on parts for ship engines and wind power plants. The shares were offered in a range between W30,600 and W32,250, which represented a 3%-8% discount versus yesterday's close of W33,250. After a bookbuilding that lasted slightly less than two hours, the price was fixed towards the low end at W30,950 for a discount of 6.9%.

Like for Hyunjin before it, a majority of the buyers were Korean investors and overall the order book was said to have included about 20-25 accounts.

The sale came a day after Yonghyun's shares closed at a 12-month high, suggesting investors have faith in the company and its increasing focus on the renewable energy sector. A 3.1% drop in the share price yesterday also helped make the discount on offer slightly more attractive. Still, the share price has rallied more than 350% since the end of October, making it a good time for H&Q to sell.

The source says the fact that the private equity firm has cashed out of two holdings in Korea in one week is unlikely to be a sign of a wider move out of this country. Rather, it is more likely that the firm is monetising some of its long-term holdings to realise some cash that it can use to invest in other cheap opportunities that result from the financial crisis.

H&Q invested in the two related entities of Hyunjin and Yonghyun in 2006 and is believed to have more than doubled its money since then. It still has another eight investments in Korea.

The $55.4 million Hyunjin block, which represented 13.9% of the company, was priced at the top of the offering range for a discount of 4.9%. The share price gained 4.7% the day after the sale (Wednesday), allowing investors to immediately take some profit, before retreating 2.7% yesterday.