Credit impact of firms planning to delist uncertain: Fitch Ratings

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Published: June 12, 2020 4:52 AM

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, Fitch observed.

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.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.

The credit impact of some Indian companies planning to privatise will be largely driven by their funding and capital structures post-privatisation and the effects these would have on the linkages between various entities in the groups and cash flow access, said Fitch Ratings.

HT Global IT Solutions Holdings (HT Global, BB-/Rating Watch Evolving) and Vedanta Resources (VRL) have announced plans to delist their Indian subsidiaries Hexaware Technologies (Hexaware) and Vedanta, respectively, while Adani Power is also evaluating a delisting.

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, Fitch observed.

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.

Delisting will give parent entities like HT Global and VRL better access to their arms’ 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.

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 July 14, 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.

VLTD’s parent will fund its delisting through debt. This is expected 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.

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