Banks stuck with $7.5 bn Bharti loan3 min read . Updated: 21 Jul 2010, 11:22 PM IST
Banks stuck with $7.5 bn Bharti loan
Banks stuck with $7.5 bn Bharti loan
Mumbai: Banks that syndicated a $7.5 billion (Rs35,475 crore today) loan to Bharti Airtel Ltd to fund its acquisition of the African business of the Zain Group are finding it difficult to sell the debt to other banks at a profit, according to two investment bankers familiar with the development, who did not want to be identified.
According to bankers, the cost of the loan rose after rating agency Standard and Poor’s (S&P) downgraded Bharti Airtel’s long-term debt rating in June to BB+ from BBB-.
BBB- is considered lowest investment grade while BB+ is considered highest speculative grade.
At least one arranger for the Bharti Airtel loan, Bank of America Merrill Lynch (BofA-ML), has decided to book mark-to-market (MTM) loss for its $600 million exposure.
MTM is an accounting practice of valuing investments at the current market price rather than the price at which they were bought.
Bharti Airtel raised the loan at 195 basis points (bps) over the London interbank offered rate (Libor), an international benchmark, for a tenure of six years.
One basis point is one-hundredth of a percentage point.
The banks considering buying the debt expect a rate of at least Libor-plus 250 bps, according to one of the investment bankers. A higher interest rate leads to a lower selling price for a loan.
A senior BofA-ML official confirmed that the bank has decided to book an MTM loss on its exposure and that its Hong Kong office is currently scouting for buyers.
S&P’s managing director (ratings) for South and South-East Asia Suzanne Smith said that Bharti was already under its credit watch when the loan was raised in March.
“We think that the loan pricing was concluded at the initial stages of the acquisition process, which was subsequent to S&P’s placement of the company on credit watch (negative) where we indicated that the rating would likely be lowered by one notch to BB+ upon completion of the acquisition," she said.
Typically, banks that form a syndicate give loans at the first stage to a firm and they sell down a bulk of it to other banks at a price which is higher than what they had paid, and make some profit in the process. In investment banking parlance, this spread is called skim. They also earn a small arrangement fee. The arrangement fee is a one-time income while they earn skim for the entire tenure of the loan. For the Bharti Airtel deal, the arrangement fee was 20 bps.
If the members of the Bharti loan syndicate indeed decide to sell their exposure to other banks, they will end up booking a $41.25 million loss, according to Mint estimates.
If they decide to hold on, they won’t incur a loss, but will have to keep their money tied up for six years. This will restrict their ability to lend to other telecom companies as banks have sectoral exposure limits, which means that there is a cap on how much they can lend to companies in a particular business.
“Globally, various banks are looking at the Indian telecom sector quite closely. They are somewhat concerned about the money paid for the 3G and broadband licences, about the regulatory risks, competition. But it’s a very large market despite the competition and companies are trying to de-leverage," said Mehul Sukkawala, telecom sector analyst at S&P.
Officials of both Standard Chartered Bank Plc and Hongkong and Shanghai Banking Corp. Ltd, who participated at the loan syndication, declined comment. Barclays Plc did not answer an email sent on Saturday.
The average tenure of the debt is 4.7 years and the first principal outgo comes after 2.5 years, Bharti officials had said in a conference call with analysts on 14 July. The interest outgo is $200 million per year.
“We expect a skim of at least 3-4 basis points on our loans for this syndication. There is no point in syndication if we have to book losses," said another investment banker, who did not want to be identified.
According to him, no telecom firm can expect to raise a loan at less than 250-300 bps over Libor.
“Companies have various options to raise funds and ECB (external commercial borrowings) may not be that attractive relative to other sources of funding at all points in time," said S&P’s Smith.