United Spirits may drop $225-mn FCCB issue

United Spirits, India’s largest spirits company, is likely to drop the $225-million foreign currency convertible bond (FCCB) issue it had planned to retire a part of its high-cost debt. Instead, the UB-Group owned company is understood to be considering a $300-million bond issue in the global market.

According to senior UB Group management officials, United Spirits has been trying to sell the issue to various global investors. So far, however, the response to this has been muted. “There are a couple of factors going against United Spirits. One is, of course, the company’s highly-leveraged situation, with a gearing ratio of 1.7, and the inherent need to infuse equity at the earliest. Other factors are the volatile situation global markets are going through and the high number of defaults from Indian companies that had earlier raised resources through FCCBs,” a company official told Business Standard. Standard Chartered Bank, Rabo Bank and DBS Bank were mandated for the issue, expected early this year but deferred to the second quarter of this financial year.

 

During the past few years, scores of Indian companies have been tapping the FCCB route, as FCCBs have a zero coupon rate and an option for bond holders to convert these into equity after three to five years, if the stock appreciates. Most Indian companies, expecting appreciation of their stocks, had opted for this route. However, due to various domestic and global factors, bond holders were left with depreciated stock, while companies weren’t left with enough resources to service bond holders.

Bond holders usually look at returns of 1.6 times, if they do not opt to convert the bonds into equity. As a result, now, bond holders are either involved in various legal disputes or are restructuring the bonds.

United Spirits is now considering a bond issue in the foreign market, as the interest rates there are as low as three per cent.

During the past two years, the company has been trying to address its highly-leveraged, $1.2-billion acquisition of Scottish whisky major Whyte & Mackay in 2007. It has raised Rs 2,715 crore through part-sale of treasury stock and a qualified institutional placement in 2009. In July 2011, it refinanced £370 million of debt it had raised to finance the Whyte & Mackay acquisition. However, these steps have not helped address the gearing, which is proving to be unwieldy. The company is now finding it difficult to even raise working capital easily.

Industry analysts indicate there is an urgent need to recapitalise United Spirits’ balance sheet. Without this, they say, the company would find it difficult to service the mounting interest costs on the debt of about Rs 8,000 crore. Last financial year, for instance, interest costs rose 34 per cent.

The market is rife with speculation of United Spirits finalising a move to unlock value in Whyte & Mackay. This would, to a large extent, address the gearing issue. Industry analysts, too, are keeping a tab on speculation of Diageo, the world’s largest spirits company, acquiring stake in the company. United Spirits’ management has maintained while the company would have to walk a tightrope until deleveraging is carried out, operations have not been hit. It added it would take concrete steps in the second quarter of 2012-13.