Hexaware Technologies, a listed Indian IT products and services company, drew strong demand for a debut $300 million bond on Thursday, offering hope for the beleaguered Indian high-yield sector.
The Ba3/BB-/BB- rated deal, issued in the name of HT Global IT Solutions, attracted a $1.9 billion peak order book that held firm even after price guidance was revised for a second time during London trading hours.
A 50bp tightening from initial guidance of 7.625% to final guidance of 7.125% (following revised guidance of 7.325%) also represents the most aggressive narrowing for an Asian high yield bond this year.
Syndicate bankers said a couple of Asian and European accounts dropped out when pricing was revised for a second time but their place was taken by US accounts, which ended up taking about 25% of the deal compared to Asia's 65% and Europe's 10%, according to preliminary distribution data.
Final pricing for the five non-call three Reg S/144a offering was fixed at 99.482% on a coupon of 7% to yield 7.125%.
Fund managers took the bulk of the transaction, accounting for about 83% based on preliminary stats, with private banks 16% and corporates the remaining 1%. About 157 accounts participated in total.
Comps complicate credit analysis
Bankers suggested fair value around the high 6% mark. However, forecasts are complicated by the fact that some of India’s lesser-known investors have provided investors with a very torrid ride down the yield curve over the past 12 months.
The most recent issue, a $200 million five non-call three issue for Lodha Developers, was priced in March 2015 with a 12% coupon. Moody’s and Fitch have since downgraded the Ba3/B+ rated property developer to B1/B. Its bond is currently yielding 13.72%.
Even worse has been the performance of IT solutions provider Rolta, which has a $200 million 2018 bond outstanding and a $375 million 2019 bond. Last April, short-seller Glaucus Research accused the company of materially overstating its Ebitda.
The two bonds immediately dropped 15 points to about 84 cents on the dollar and spent the rest of the year plummeting to 15 cents on the dollar, the level Glaucus estimated fair value would lie in the event of a recovery scenario.
Better-known Indian companies with a similar rating to Hexaware have also had a bumpy ride over the past year due to a combination of elevated debt levels and overcapacity.
Reliance Communications, for example, has a Ba3 rating. However, Moody's placed the company on negative outlook in February citing persistent delays offloading non core asset to reduce debt to Ebitda, which rose from 5.3 to 6.3 times over the course of 2015.
The group's 6.5% October 2020 bond is currently trading around the 101% to 101.5% level, equating to a yield of 6.1% to 6.245%, according to various brokers estimates. It has been on a downward slide since the beginning of April.
The other two major companies with low double B ratings are both in the steel sector, which has been plagued by China's inability to rein in overcapacity. As a result, both Tata Steel and JSW Steel have been on the receiving end of downgrades.
Tata Steel was downgraded from BB to BB- in January and JSW Steel from Ba1 to Ba3 in February.
The former has a 4.85% January 2020 bond trading around the 4.5% level and the latter has a 7.5% November 2019 bond trading around the 7.14% level. Both deals have traded up since their downgrades were formalised and steel prices started rising.
Hexaware's 7.125% yield looks even more enticing in comparison to non-Indian comparables such as Nasdaq-listed Sabre Corp, which has an April 2023 bond yielding 4.82%. It also shares a BB- rating and operates in the same sector.
Strong upside potential in secondary markets?
Hexaware's lack of name recognition and established track record in the international bond markets was always going to necessitate a premium. However, if the company is able to live up to analysts' expectations, bond investors stand to do well since peers are trading up to 200bp tighter.
On the plus side, Hexaware offers a well-respected and experienced sponsor, Barings Asia Private Equity Fund, with a strong growth profile that benefits from the company's low cost base in India and a roster of international clients.
Barings purchased a 71% stake in Hexaware in 2013 for $443 million and has since received $90 million in dividends according to Kotak research.
The rating agencies point out that this remains one of the key risks attached to the credit given financial sponsors' history of extracting value through dividends and elevated debt.
The covenant package for the deal attempts to comfort investors with limitations on indebtedness. A portion of the bond proceeds will fund an interest reserve account holding four semi-annual coupon payments.
A collateral account will also hold proceeds from any share sales by Barings. There is also a charge over all the capital stock held by Barings and a change of control put option.
HT Global is not allowed to increase its debt levels unless consolidated debt to Ebitda is below 3.75 times. At the end of the 2016 financial year, this stood at 3.5 times.
The HT Global bond represents the only debt in the consolidated capital structure, but ranks subordinate to Hexaware Technologies creditors and cash flows.
Kotak argues that Hexaware's ability to grow may be constrained by the bond's debt covenants since it "believes niche acquisitions are important to fill gaps in vertical and service operations."
However, the securities house says it remains positive on the company because of its strong management, clear strategy of providing niche products to large cap companies and a full service to mid-tier players, plus the impressive overhaul of its Business Process Outsourcing (BPO) practise.
Tech companies do not normally appeal to bond investors but bankers argued that, while Hexaware does not benefit from a recurrent revenue stream, it does have a very sticky customer base.
In 2015, 81.4% of its revenues came from the US and 17.8% from Europe. Its top 10 customers accounted for more than 50% of revenues and its top 20 average an 11-year relationship with the company.
Revenues have grown by a compound annual growth rate of 20.2% over the past five years. Kotak highlights strong growth winning over new customers, with $156 million of new contract value over the past 15 months.