Credit impact of delistings by Indian corporates uncertain: Fitch

14/06/2020

Mumbai, June 13: The credit impact of some Indian corporates' plans to privatise will be largely driven by their funding and capital structures post-privatisation and the effects these will have on the linkages between various entities in the groups and cash flow access, according to Fitch Ratings.
HT Global IT Solutions Holdings Ltd and Vedanta Resources Ltd have announced plans to delist their Indian subsidiaries Hexaware Technologies Ltd and Vedanta Ltd respectively while Adani Power Ltd is also evaluating a delisting. The announcements follow the recent relaxation of delisting rules in India and the fall in share prices in recent weeks which have given major shareholders incentive to delist companies to simplify corporate structures and gain greater control.
The completion of any delisting is subject to the final delisting price and the ability of the parent to raise sufficient financing, but Fitch expects the privatisation and resultant increase in control by the parent to strengthen its linkages with the subsidiary, giving it better access to the subsidiary's cash flows.
In Fitch's view, the funding used by the parent to purchase shares in the subsidiary will determine the group's post-privatisation capital structure and ultimately the financial profile of the group.
While the financial profile of the group will benefit from lower dividends to minority shareholders after a delisting, additional debt and the related interest burden for the privatisation may negate this benefit.
Fitch's adjustments for the consolidated financial metrics for a group either by adjusting consolidated EBITDA for minorities' share of earnings or using a proportional consolidation approach to EBITDA results in a lower level of cash and assets than without the adjustments.
Therefore, delisting will give parent entities like HT Global and Vedanta Resources better access to their subsidiaries' cash flows which could help the parents deleverage. However, a parent's desire for cash returns may also lead to higher dividend payouts from its entities, which will limit the pace of deleveraging at the group. Delistings also allow corporates to simplify or reorganise complex group structures without the interference of large minority investors. More efficient group structures could lead to improved operations and faster execution. However, a highly concentrated shareholding could increase governance and key-man risks.
HT Global's management expects to finance the privatisation of Hexaware largely through an equity infusion from its parent Baring Private Equity Asia, which would improve HT Global's leverage and financial flexibility for refinancing the secured notes due 14 July 2021.
The ultimate capital structure, however, will only be determined after refinancing the bonds when new financial covenants are established in the new financing documents.
"We expect Vedanta Resources Ltd's parent to fund its delisting through debt. We expect this to increase the group's leverage, the extent of which will depend on the final acquisition price. The increase in leverage could be offset by cash savings from lower dividend payments to minorities and greater efficiency through a simplified group structure," said Fitch.
Final delisting prices are determined by a reverse book-building process and require approval from at least 90 per cent of shareholders. However, the recent changes to the delisting rules allow the acquirer to make a counter offer if the price discovered during the reverse book-building is not acceptable, said Fitch.

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