Home / Companies / News /  Carlyle to raise $1 billion debt for Hexaware deal

MUMBAI : Mumbai: Private equity firm Carlyle plans to raise $1 billion in debt through an offshore bond issuance to finance the nearly $3 billion acquisition of software services firm Hexaware Technologies, according to Moody’s Investors Service.

The proposed debt offering by CA Magnum Holdings (CAMH), a special-purpose investment holding firm set up for the deal, has been assigned a B1 rating, the international rating agency said in a note on Friday. B1 is considered below investment grade rating. The bonds are due in 2026.

Mint first reported on 5 September that Carlyle was in talks with banks to raise $1 billion debt to finance the Hexaware buyout. “The proceeds from the proposed bond will be initially kept in an escrow account and will ultimately be used to fund CAMH’s planned acquisition of a 95.42% stake in Hexaware. Should the proposed acquisition not proceed as planned, CAMH will redeem the bonds in full along with any accrued and unpaid interest by largely using the proceeds in the escrow account," Moody’s said.

CAMH’s rating reflects the credit quality of Hexaware as the software company will be the only source of cash flow to service its debt obligations, the rating agency added. “Hexaware’s resilient business profile, supported by tailwinds from the pandemic resulting in accelerated digitization of business processes along with its high Ebitda-to-cash-flow conversion and strong liquidity also support CAMH’s rating," said Sweta Patodia, an analyst at Moody’s.

Hexaware serves customers in the digital solutions segment within the software services industry, including digital product engineering, digital core transformation, enterprise and next-generation services, cloud transformation and data analytics.

In line with rising demand for such services, Moody’s expects that Hexaware’s operating performance will remain strong and that the company’s revenues will grow 14-15% annually over the next 2-3 years, the rating agency said.

“However, CAMH’s rating also factors in the company’s high starting leverage and dependence on dividends from Hexaware for its debt service requirements," Patodia said. According to Moody’s, CAMH’s consolidated leverage, as measured by gross debt/Ebitda, will be around 6 times immediately following the transaction in December. This is high for CAMH’s current ratings, but Moody’s expects its leverage to decline to around 4.7 times by December 2023 and around 4 times by 2024. Ebitda, a measure of a firm’s operating performance, stands for earnings before interest, tax, depreciation and amortization.

Moody’s expects Hexaware’s Ebitda to improve to around $233 million by 2023 from around $179 million in 2021. Hexaware reported revenues of around $919 million for the 12 months ended September 2021. The firm also has an opportunity to win new business from Carlyle’s other portfolio companies, which collectively spend around $1 billion on IT services each year, Moody’s said.

“As of 30 September 2021, Hexaware had cash and cash equivalents of around $189 million, compared with a total debt of $23 million. Moody’s expects a steady cash build up on the balance sheet as the company will continue to generate $80-90 million in cash flow each year (after accounting for interest expenses on the bond), while capital spending needs will be minimal and limited to around 2% of revenues," Moody’s said.

ABOUT THE AUTHOR

Swaraj Singh Dhanjal

" Based in Mumbai, Swaraj Singh Dhanjal is responsible for Mint’s corporate news coverage. For the past eight years he has been writing on the biggest deals in private equity, venture capital, IPO market and corporate mergers and acquisitions. An engineer and an MBA, he started his journalism career in 2014 with Mint. "
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