^Acquisition Finance Structures

Illustrative structures
October 2012

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^ Acquisition Financing Main aspects to look for

FACTORS DRIVING ACQUISITION FINANCE Lender s Perspective Adequate security with commensurate return Protection against default Promoter comfort and contribution Companys Perspective Minimum equity contribution Appropriate leveraging through an optimal funding structure balancing cost and risk Limited recourse to parent for repayment - Ring fencing liability associated with acquisition STRUCTURING REQUIREMENT Myriad transaction specific structuring options available Different contemporary financial instruments for funding the acquisition including debt, mezzanine and equity options Indian and offshore laws and regulations relating to acquisition, tax and investment BROAD STRUCTURING OPTIONS Share Acquisition Vs Asset Buyout Recourse Vs Non-Recourse Leveraged Vs Own Balance Sheet BROAD STRUCTURING GUIDELINES Senior debt usually available upto 2.0-3x EBITDA with another 1x in the form of mezzanine debt Preference for loading debt and arranging the balance as equity, especially in the case of leveraged acquisitions Average split ratio between debt and equity of 70:30 though highly variable and transaction specific Debt capacity a function of many factors including cash flow margins and stability, capex requirements, operating track record and existing balance sheet debt Security structuring a challenge if not enough Assets available Debt-only investors are primarily banks possessing the lowest cost of funds where as debt + mezzanine + equity investors include funds and institutions
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^Overseas Acquisition Finance

Illustrative structures

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^ Overseas Acquisition Financing Option 1 Funding in Indian Company

STRUCTURE

KEY TERMS Parameter Details

Parent Borrower
Debt
ONSHORE OFFHORE

Indian Operating Company Foreign Currency Term Loan (ECB) Up to 3x of EBIDTA 5-7 years Amortizing over a period of tenor with moratorium of 1-2 years Libor + 400-500 bps p.a. 1st charge over the Assets of the Borrower

Funding Instrument Amount Tenor

Equity Lender

Acquirer SPV Repayment Pricing Target Security

Advantages Advantages

Simple structure Investor friendly Easily doable

Points Points to to consider consider

Pledge of Shares of Target Cash flow of Borrower Takeout Dividend from the Target Conditions End use Investors Financial covenants like D/E, D/EBIDTA, DSCR Acquisition of shares of a Foreign Company Banks

End use restrictions apply Prepayment not allowed Exposure to Foreign currency fluctuation risk

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^ Overseas Acquisition Financing Option 2 Funding in Overseas Company

STRUCTURE

KEY TERMS Parameter Details

Parent
Corporate Guarantee

Borrower
ONSHORE OFFHORE

Acquirer SPV or Overseas Subsidiary Foreign Currency Term Loan Up to 3x of EBIDTA 3-7 years Amortizing over a period of tenor with moratorium of 1-2 years Libor + 300-500 bps p.a. 1st charge over the Assets of the Target/ Borrower

Funding Instrument Amount

Equity Lender Debt

Tenor Acquirer SPV Repayment Pricing Target Security

Advantages Advantages

Simple structure Flexibility on Tenor, End use etc. Easily doable Low cost
Points Points to to consider consider

Corporate Guarantee from the Parent Company Pledge of Shares of Target

Takeout Conditions End use Investors

Dividend from the Target Financial covenants like D/E, D/EBIDTA, DSCR Acquisition of shares of the Target Banks, FIs

Targets cash flow should be sufficient to service the debt Merger of Acquirer SPV with Target needs to happen to create charge over Targets assets

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^ 3) Overseas Acquisition Financing Option 3 Funding against existing cash

STRUCTURE

KEY TERMS Charge over Cash/ Cash equivalents Parameter Details

Lender

Parent Borrower
ONSHORE OFFHORE

Acquirer SPV or Overseas Subsidiary Foreign Currency Term Loan Up to the amount of SBLC 1-5 years Amortizing over a period of Tenor or Bullet at the end of tenor Libor + 300-350 bps p.a. Stand By Letter of Credit (SBLC) by another Bank Invocation of SBLC

SBLC

Funding Instrument

Equity Lender Debt

Amount Tenor

Acquirer SPV Repayment Pricing

Advantages Advantages

Target

Security

Lowest Cost No need to convert existing cash in an unfavourable exchange rate scenario Can act as a Bridge funding

Takeout Dividend from Target Conditions SBLC should cover Principal + Interest Acquisition of shares of the Target Banks, FIs

Points Points to to consider consider

Company needs to have idle Cash Cash will be locked till the tenor of SBLC Not suitable for a long tenor funding Complex structure involving multiple Lenders

End use Investors

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^Domestic Acquisition Finance

Illustrative structures

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^ Domestic Acquisition Financing Option 1 : Funding from Domestic Lender

STRUCTURE Working capital Loan / Debt KEY TERMS Parameter Details

Lender

Acquirer

Borrower Funding Instrument Amount

Acquirer Working capital Loan/ Rupee Term Loan/ Rupee Non Convertible Debenture (NCD) up to 3x of EBIDTA of Acquirer 4-5years Amortizing over the entire tenor 12-16% p.a. 1st pari passu charge over the Assets of Borrower

Target
Tenor
ONSHORE

Repayment Pricing

Advantages Advantages

Simple structure Investor friendly Highly doable

Points Points to to consider consider

Security Pledge of shares of Target Cash-flow of Borrower Takeout Dividend from Target Refinancing Acquisition of Shares of Target End use To monetize receivables Investors Banks, NBFCs., MFs. FIs, Prop desk of foreign IBanks

High cost funding High leverage on Acquirers B/S Lenders would require at least 25% of the acquisition cost to be funded by Internal Accruals/Equity Acquirer should hold at least 51% post acquisition

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^ Domestic Acquisition Financing Option 2 : Funding from Foreign Lender

STRUCTURE KEY TERMS Parameter Details

Acquirer
Borrower Funding Instrument
NCD

Acquirer Rupee Non Convertible Debenture (NCD) up to 3x EBIDTA of Acquirer 3-5years Amortizing over the entire tenor 13-14% p.a. 1st pari passu charge over the Assets of Borrower

Target

Amount Tenor

ONSHORE OFFSHORE

Repayment Pricing Security

Lender
Advantages Advantages

Pledge of shares of Target Cash-flow of Borrower Takeout Dividend from Target Acquisition of Shares of Target End use Any other purpose Investors FII

Provides access to Foreign Investors to participate in the Domestic Acquisition transaction Simple structure Cost will be slightly lower compare to Domestic investors
Points Points to to consider consider

Requires Investor to be registered with SEBI as FII or Sub account Pricing will be based on the hedging cost to the Investor

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^ Domestic Acquisition Financing Option 3 : Debt at Acquirer + SPV

STRUCTURE Debt KEY TERMS Parameter Details

Lender

Acquirer

Borrower
Corp o Gua rate rante e

1. Acquirer 2. SPV owned 100% by Acquirer Acquirer - Rupee Term Loan SPV Optionally Convertible Debentures (OCD) Acquirer - up to 3x of EBIDTS of Acquirer. SPV up to 2x of EBIDTA of Target Acquirer - 4-5 years SPV 2-3 years Acquirer - Amortizing over the entire tenor SPV Structured with Moratorium till merger of SPV happens with Target 13-16% p.a. 1st pari passu charge over the Assets of Borrowers Pledge of shares of Target Corporate Guarantee from Acquirer for SPV level funding Cash-flow of Acquirer + Target post merger Dividend from Target Refinancing Acquisition of Shares of Target NBFCs., MFs. FIs, Prop desk of Foreign I-Banks

Funding Instrument

Lender

Debt Pledge of shares

SPV
Amount Tenor

Target
ONSHORE

Repayment Pricing

Advantages Advantages

Leverage can be higher due to Targets cash flow being used for Debt servicing post merger
Points Points to to consider consider

Security

SPV/Acquirer needs to be merged with Target for the structure to work Till merger, the debt servicing needs to happen from cash flow of the Acquirer Lenders need to be comfortable with overall high leverage Cost is high due to entire loan in Rupee

Takeout End use Investors

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^ Comparison of debt sources/instruments

Parameter Amount depends on Currency Tenor (years) Pricing (p.a.) Security Investors Timelines for completion Do ability Term Loan Cash flow Rupee 3-5 14-15% Assets + Shares NBFCs 2-3 months High NCD Cash flow Rupee 4-5 13-15% Assets + Shares NBFCs, MFs, FIs 2-3 months High FII Debt Cash flow Rupee 3-5 13-14% Assets FII 3-4 months Medium ECB Permitted End use USD/GBP/EUR 5-7 5-6% (L+4-5%) Assets Banks 1-2 months Low Working capital Loans Receivables USD/GBP/EUR 1-3 3-4% (L+2-3%) Receivables Banks 1-2 months High

Note: Offshore funding structures are more complex and difficult to implement. High Most appropriate routes to Complexity ECB Medium FII Working Capital NCD Low Term Loan
Size of bubble represents tenor in average number of years

raise debt financing in order of preference : 1)Working capital Loans 2)Debt from NBFC 3)ECB

Pricing
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^Other Considerations

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^Key Consideration for Structuring a Transaction

Areas Terms affected Points for consideration

FDI
FEMA ODI RBI Legal aspects Companies Act

Borrower
Funding Instrument Security Security Enforceability of Security Security Repayment

Foreign currency funding in India can only happen in a Operating Company and not in an Investment Company Restricts funding at Parent Level
Any foreign currency funding can happen only through Compulsory Convertible structure (CCPS or CCD) Funding will be more in the form of Equity than Debt Indian company can give Corporate Guarantee to the extent of 400% of its own Net-worth for funding at Overseas Subsidiary No foreign investor can have charge over assets in India except in case of External Commercial Borrowing (ECB) No foreign investor can have a Pledge of Indian Companys shares without RBI approval Investment by Foreign Investors in the form of CCD/CCPS with PUT option and Fixed IRR are not seen favorably by the Regulator. PUT option structure is considered weak and has not been tested legally therefore increasing the risk and reward expectation Section 77 and 295 - Public Companies are not allowed to provide any form of support for loan at Parent Company or for a loan taken for acquisition of its own shares Section 295 and 372 -. Intercompany loan is governed by certain regulations and free reserve of the Company Dividends can only be paid from Net profit of the Company Buyback of shares by the Company is governed by net-worth limit Withholding Tax on any interest payment made to Foreign Investor Dividend Distribution Tax for transferring any dividend to Shareholders (Hold Co)

Tax aspects

Repayment

ECB

Various

Minimum Average maturity of the transaction has to be 5 years for transaction over USD 20 Mn Pre-payment not allowed End use restricted to investment in Overseas subsidiary or acquisition of foreign companies Pricing cap of Libor + 500 bps p.a.

Local Laws

Security Borrowing Amount

Targets Assets/Cash flow/Guarantee may not be available as security for the acquisition debt under the Financial Assistance Rule in Spain Some countries have Thin Capitalization Rule which requires Acquirer to put at least 25% of the consideration as Equity while 75% can come in the form of Debt
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^ Contact Details
GIRISH NADKARNI
Executive Director Email: Girish.Nadkarni@avendus.com Cell: + 91 9967966100 Landline: +91-22-6648 0906

Avendus Capital Pvt. Ltd. Mumbai IL& FS Financial Centre B Quad, 5th fl, Bandra Kurla Complex Bandra East, Mumbai, India 400051 Phone: +91-22-6648 0050 / 0950 Fax: +91-22-6648 0040 / 0940 Bangalore New Delhi # 1 & 2, The Millenia Suite 22A/B, The Aman Tower A, 10th Fl, Murphy Road, Lodhi Road Ulsoor, Bangalore, India New Delhi 110003 560001 Phone: +91-11-4535 7500 Phone: +91-80-4115 0000 Fax: +91-80-2555 0868 www.avendus.com New York 100 Park Avenue, 16th fl. New York NY 10017 Phone: +1-212-351 5066 Fax: +1-484-231 2343 London 32 Brook Street London W1K 5DL, UK Phone: +44 20 7647 7700 Fax: +44 20 7647 7710

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