Bangalore: United Spirits Ltd (USL) said on Thursday that it will raise as much as $225 million through the sale of foreign currency convertible bonds (FCCBs) to cut its high-cost loans. Standard Chartered Bank Plc, Rabo Bank and DBS bank have been appointed as advisers to the issue, which is scheduled to take place early 2012. The funds will be raised through the sale of FCCBs to the extent of $175 million, with a greenshoe option of up to a further $50 million.
A greenshoe option gives the issuer the right to sell more shares to investors than originally planned in a public offer, if there is demand.
“This fund raising will result in 50% interest savings,” said Ravi Nedungadi, president and chief financial officer of UB Group. The company is proposing to raise the funds at a “single-digit” interest rate and list the bonds on the stock exchange in Singapore, Nedungadi said.
A statement issued to the stock exchanges said the funds will help the company retire high-cost debt and consequently improve profit and earnings per share.
The company won’t use the proceeds of the bond sale to help UB Group-promoted Kingfisher Airlines Ltd, which has sought more working capital from banks and has cancelled flights owing to a cash crunch. The company statement is merely an intent and doesn’t mention details such as conversion price and maturity period.
The UB group’s spirits arm had a debt of about Rs 7,750 crore as of September end and the firm has been paying approximately Rs 125 crore per quarter toward interest. USL’s market capitalization is Rs 7,900 crore, implying poor leveraging capability. In the quarter ended September, interest costs rose 26% on account of the higher cost of debt and working capital funding.
Much of USL’s debt woes come from its Rs 4,800 crore purchase of Whyte and Mackay Ltd in 2007. On top of that, it has also been buying distilleries across Andhra Pradesh, Karnataka and Maharashtra. This is the fourth time in two years that USL has been attempting to pare its debt.
In 2009, USL sold part of its treasury stock worth Rs 1,100 crore and soon after raised Rs 1,615 crore by allotting shares to qualified institutional investors. Earlier this year, the liquor maker recast debt of £370 million as a new seven-year loan. The new loan has a three-year moratorium with a balloon payment over the next four years. The total hedged cost of this new loan is 45 basis points lower than the previous one.
“FCCBs are a good option with the rupee at an all-time low, so the company may have a lower payout when the currency appreciates,” said Nikhil Vora, managing director of IDFC Securities Ltd, who had earlier downgraded the company to neutral, citing structural issues says. In the “worst case it gets converted to equity,” he said.
“The move will help bring leverage to the company’s debt-ridden balance sheet,” said Arnab Mitra, analyst with India Infoline. However, he warned that USL shouldn’t bank on the rupee appreciating. “It’s tough to predict how macro economic factors play out.”