'2009 was a good year, next will be brighter'

'2009 was a good year, next will be brighter'

Q&A: Vedika Bhandarkar, MD & Head of Investment Banking, J P Morgan
Abhineet Kumar & Sidhartha / Mumbai December 23, 2009, 0:36 IST

Investment banking shifted focus in 2009, as capital raising dominated over mergers and acquisitions (M&As) advisory. US-based J P Morgan led this shift globally. Vedika Bhandarkar, managing director & head of investment banking, tells how even in a supposedly bad year, banks raised about Rs 1,00,000 crore. In an interview, she tells Abhineet Kumar and Sidhartha that this signals hope for the advisory business to pick up in 2010, after a year when J P Morgan was missing from the top of the league table. Excerpts:

So, is it the end of a bad year?

No. A good year is now coming to an end. In 2008, things really slowed down. Till January-February (2009), the equity and debt capital markets were pretty much shut and only M&As announced earlier were concluded. So, 2008 was pretty weak. On the contrary, 2009 has been good. When we went into the calendar year, it did not look like it would be a good year. The first four months were quiet, but we have seen a spate of capital issuances since May. It started with deleveraging, but now we are seeing a little bit of growth capital. Things are not back to normal on the M&A front, but there are enough signs that the activity will pick up in 2010.

Despite a lot of growth in capital markets, bank lendings are growing slowly?

Bank borrowings always lag the recovery in capital markets. Companies in most sectors are optimistic about 2010. A lot of profit growth has come from cost reduction. Companies want sustainable growth for a couple of quarters before they start dusting out old expansion plans. We expect bank borrowings will pick up in the second half of 2010.

In the first quarter of 2008, there were certain public issues that drained out liquidity and forced others to shelve their plans. The next quarter will be a busy one with a large number of issues lined up. Do you again anticipate liquidity issues?

In 2008, the market was not affected because of a few issues. The global crisis had started and money stopped flowing in. Domestic liquidity also started getting tight. The amount of capital raised this year is just under $20 billion (around Rs 93,000 crore). In our best year, which was 2007, the capital raised was $35 billion. So, there is still a fair way to go. Global liquidity is quite high and the flow into equity and emerging market funds will continue. On the domestic side, insurance had a tough 2008, but the situation is better now. There are a lot of prospectuses that have been filed with the Securities and Exchange Board of India (Sebi), there are companies which have raised capital and will come back next year. Besides, there are very few mid-caps that have raised capital this year. There will be a lot of supply, but we are not sure if there will be enough demand for all the issues.

Will the government’s disinvestment programme crowd out private sector issues?

From the numbers announced so far, it does not look so. But if the government wants to bring 10 or 15 more issues, then may be.

How will rising valuations affect M&As, especially inbound deals?

Ideally, M&As should peak when valuations are low. But in practice, it is the other way round. That’s because companies, the buyers and the sellers, are not confident during tough times. Now companies in the US are shifting focus from survival to growth. People have started talking about M&As, which was not the case six months ago. But with strong equity markets, valuations have started emerging as a concern.

Where do you expect to see more activity?

In traditional sectors such as healthcare, information technology services, telecom and general manufacturing.

Are telecom companies getting desperate to expand overseas at a time when consolidation talks are gaining strength here?

There is no desperation. In India, Bharti got some good operating lessons in one of the lowest tariff environments. It has been looking out at markets with similar characteristics. Consolidation in the Indian telecom sector is a given, but we do not know if it will happen in the next 12, 24 or 36 months. Consolidation is bound to happen with tariffs falling and so many players.

The banking sector is also crowded and there is talk of consolidation…

It is completely linked to the government, which accounts for 70 per cent of the banking sector business. We are much more bullish on telecom consolidation happening sooner.

In terms of financing, will there be more of structured finance in coming days?

The market has come out of a major crisis. Right now vanilla financing seems good. Experimenting is on the margin. In private transactions, structuring is back, but not on the public side.On M&As, it was a bad year for the industry as a whole.

How would you rate it for J P Morgan?

The focus for the company this year was on equity fund raising, and we are ranked number one there (in the global league table). In terms of M&As, there have been very few large completed transactions in India. We closed the DoCoMo transaction earlier this year.

Equity market harvest seen at new high

Equity market harvest seen at new high
Abhineet Kumar / Mumbai December 18, 2009, 0:26 IST

Companies plan to benefit from the high inflow of foreign funds.

The equity capital market is set to see its highest quarterly fund raising ever in January-March next year as public and private sector companies plan to tap investors to benefit from the high inflow of foreign funds.
The figure next quarter, according to Citi Global Markets, may be as high as Rs 70,000 crore, though the projections of fellow investment bank Kotak Mahindra Capital Company and research house Prime Database are more tempered at Rs 33,000 crore and Rs 30,000 crore, respectively.
The previous highest equity and equity-linked fund raising – initial public offers (IPOs), follow-on public offers (FPOs) and qualified institutional placements (QIPs) — in a quarter was Rs 26,123 crore in April-June 2007, according to Prime Database.

POSITIVE OUTLOOK

HIGHEST QUARTERLY FUND RAISING SO FAR
April-June 2007 Rs 26,123 crore
This year so far Rs 53,080 crore

ESTIMATES FOR JANUARY-MARCH 2010
Prime Data Base
Rs 30,000 crore
Kotak Mahindra Capital Company
Rs 33,000 crore
Citi Global Markets
Rs 70,000 crore

“The state of the secondary markets, the government’s resolve to speed up divestment at the right price, and timely approval of offer documents may lead to a record quarter in the Indian capital markets,” said Prithvi Haldea, Prime’s chairman and managing director.
Foreign institutional funds, which posted a net outflow of $3 billion in the first three months of 2009, saw net inflow of $17 billion in the following months as stimulus packages by governments around the world increased liquidity.
“We are in sweet spot today as capital is available to Indian companies across products, markets and formats,” said Ravi Kapoor, managing director and head of South Asia, Capital Markets Origination, at Citi Global Markets, explaining how abundant liquidity was helping companies raise capital at attractive interest rates through equity, equity-linked products, and local and international bonds. “Globally, stimulus packages may get phased out over a period of time which could impact liquidity,” he said, underlining the need for companies to assess their capital needs and plan raising of funds.
Citi Global Markets was involved in 23.9 per cent – more than anyone else — of the Rs 53,080 crore raised by Indian companies this year through IPOs and QIPs, according to data compiled by Bloomberg. The investment bank says a large amount of capital is planned to be raised by real estate and power generating companies. And there is also the Rs 25,000 crore that the Indian government plans to raise by selling equity in public sector units.?
“Given that interest rates overseas are likely to remain low and the dollar under pressure, foreign flows are expected to continue in our markets in the coming quarter,” said Kapoor.?
According to Prime, 60 companies have already filed applications with capital markets regulator the Securities and Exchange Board of India (SEBI) to raise Rs 40,000 crore through IPOs and FPOs. Another 100 have announced plans to raise Rs1,00,000 crore through QIPs. This will be spread over many months, but the next quarter may account for a large chunk of it.
“We are already witnessing multiple issuances in a week,” said S Ramesh, chief operating officer, Kotak Mahindra Capital Company, which advised Godrej Properties, JSW Energy and DB Corp for their IPOs of Rs 498 core, Rs 2,700 crore and Rs 385 crore – all three of which closed this week. He attributed his comparatively conservative estimate of Rs 33,000 crore to be raised in the next quarter to the fact that pricing was the key to large issues.
The issuance window in the domestic capital markets has been active since May this year. In spite of this, the secondary market has performed well. “Still, it would not rock the boat but have only a small impact on the secondary market,” said Ramesh.
This year funds were raised mostly to reduce debt on balance sheets. The fund raising in the near future, on the other hand, will be intended to raise growth capital.
Ends

India Inc takes swap route to beat FCCB redemption blues

India Inc takes swap route to beat FCCB redemption blues
Abhineet Kumar / Mumbai November 21, 2009, 0:43 IST

Indian companies have discovered a new path to beat the redemption pressure on their Foreign Currency Convertible Bonds (FCCBs). They are swapping the old FCCBs, which had high conversion premium, with new bonds at a much lower rate.
FCCBs worth $12.7 billion, issued by 185 companies during the bull run of 2004-2007, are due for maturity in the next three years. The stock prices of 138 of these companies are currently below their fixed conversion price.
Early this week, India’s largest steelmaker Tata Steel concluded what merchant bankers call an exchange scheme for $875 million FCCBs due for maturity in 2012. The company got 56 per cent acceptance to its exchange offer, as $493 million of the old FCCBs were exchanged with new ones worth $546 million due to mature in 2014.

EXCHANGE OFFER

Company Announcement FCCB Exchange
Suzlon 21-Jul $93.8 million
Amtek Auto 11-Sep $65 million
Subex Azure* 3-Nov $98.7 million
Tata Steel 20-Nov $546 million
* Approved by the board

Suzlon and Amtek Auto also took this route in the recent past. Both exchanged their old FCCBs with new ones worth $160 million. Subex Azure has taken board approval for exchange of $98.7 million FCCBs. Experts said more companies will take this route.
FCCB is a hybrid instrument that enables a buyer to convert bonds into equity before maturity at a predetermined price. With share prices crashing much below the conversion price, companies came under redemption pressure. This prompted the Reserve Bank of India to open the window for buyback of FCCBs in December last year.
In all, 33 Indian companies bought back bonds worth $643 million using the special window. The companies raised fresh funds or dipped into reserves to use the opportunity of buyback as the converts were available at a discount. The window is going to be closed next month.
“During the height of the credit crisis, convertibles as an asset class were oversold by holders as many of them went into distress. So, FCCBs were selling at a discount,” said
S Ramesh, chief operating officer, Kotak Mahindra Capital Company, a leading domestic investment bank. “Since then, the global credit markets and the general investor situation have improved, leading to a recovery in the convertible bond prices and the consequent reduction of the discount levels,” he said.
Kotak has a collaboration with KBC Financial Products, a market leader in convertible bonds with a global presence. Tanushree Bagrodia, director, KBC Financial Products, said, “While earlier it was mainly companies under stress who were looking to exchange their FCCBs, today more companies are proactively looking to exchange their old convertible bonds with new ones and take advantage of better coupon and conversion rates besides extended tenor.” Investors too prefer this proactive approach as there is a good possibility of the bonds getting converted into equity.
Tata Steel, whose exchange offer for the FCCB got over on Friday, was able to issue new FCCBs at a premium of 15 per cent over the current market price. The new bonds have a coupon of 4.5 per cent. “The lower conversion premium makes the exchange bonds more equity-like, which is in line with the company’s overall deleveraging strategy,” said Koushik Chatterjee, group chief financial officer, Tata Steel.
But the other three companies had to make the exchange offers in distress as their conversion prices were lower than the prevailing stock price, market players said.

http://www.business-standard.com/india/news/india-inc-takes-swap-route-to-beat-fccb-redemption-blues/377139/

Investment bankers' bonuses to rise

Investment bankers' bonuses to rise
Abhineet Kumar / Mumbai November 18, 2009, 0:23 IST

Lower transaction fee will not deter companies from going the extra mile to retain talent.
Despite lower fee income from mergers and acquisitions (M&A) advisory business this year, investment bankers can hope for a rise in bonuses as banks try to retain talent.
While headhunters said the average compensation package, which includes a fixed component and a bonus, could swell to 35 per cent over last year’s level, the overall payout could be lower than in 2007, when fund-raising and M&A activity was at record levels.
“Bonuses as a whole are expected to be up 20-30 per cent, but certain top producers or ‘the hitters’ will receive the 2007-level pay in what remains an extremely competitive hiring market,” Options Group, a New York-based global executive search firm, said in a report last week. Bonus payments will be finalised next month.
This is striking as fewer deals have taken place in 2009. According to Bloomberg data, up to November 16, there were 275 M&A deals in India worth $50.9 billion. In the corresponding period last year, there were 557 deals worth $114.7 billion.
However, there were 65 capital market transactions worth Rs 57,300 crore till November 16 this year as against 50 deals worth Rs 22,700 crore in the corresponding period last year.
Along with public issues from private companies, a host of issues by public sector companies are expected to hit the market over the coming months.
Besides, there is expectation of hectic M&A activity in the coming months as companies have deleveraged their balance sheet and are now looking at acquisitions.
“Industry will continue to see top-level churn early next year as M&A advisory and primary market offerings are expected to pick up,” said Saket Jain, managing partner at Vito India, a specialised executive search firm for the investment banking and financial services industry.
“Senior investment banking community in India is a finite pool and banks will do everything to retain top talent, which is pushing compensation levels,” he said.
Last year, investment bankers received 30 per cent of their fixed pay as bonus. Headhunters estimate that this will touch 70 per cent this year. In 2007, some bankers had got nearly 300 per cent of the fixed component as bonuses.
A director-level employee with a global investment banker with over 10 years of experience earned Rs 1 crore fixed compensation and Rs 3 crore bonus in 2007. In 2008, he would have earned about Rs 1.3 crore. This year, he could hope to earn around Rs 1.7 crore, said industry players.
Sourabh Chattopadhyay, executive director at Options Group, said, “The payment of bonus could be top heavy with the bulk going to top producers.” Directors and managing directors are top revenue generators and some of them could touch the bonus level of 2007.
“Business heads would like to keep their teams intact as the industry builds up for good times,” he said.
But R Suresh, managing director, Stanton Chase International, a global executive search firm, cautions. “Despite excellent India performance, the global performance of a bank is going to weigh heavily on the total compensation,” he said.
“Banks are trying to protect their turf, doing everything such as offering mid-year bonuses from next year onwards to make it difficult for other firms to poach their employees,” said Manisha Deva, client partner, global finance practice for Korn Ferry International.

http://www.business-standard.com/india/news/investment-bankers/-bonuses-to-rise/376757/

Foreign bond market hums again as spreads decline

Foreign bond market hums again as spreads decline

Abhineet Kumar / Mumbai October 16, 2009, 0:10 IST
The 18-month drought is about to end, with several Indian companies and financial institutions planning to tap the foreign bond markets, now that spreads have declined 200 to 300 basis points.
Spreads are the rate that is paid over the benchmark Libor (London Inter Bank Offered Rate) as the cost of borrowing for overseas bonds.
According to Prime Database, a Delhi-based firm providing data for capital markets, six entities including Tata Group’s holding company, Tata Sons, and four banks plan to raise over $12 billion (around Rs 55,000 crore) through various instruments like issuance of bonds in the foreign markets.
The last such issue was by State Bank of India (SBI) in April 2008 to raise Rs 467 crore. It was the only issue in that year after the liquidity crunch pushed spreads to 600 to 700 basis points over Libor for five-year bonds. Before the credit crunch in 2007, the spread for five-year bonds were 60 to 70 basis points. Indian companies raised Rs 35,185 crore from the foreign market that year.
Investment bankers say SBI is now planning to raise $1 billion (about Rs 4,700 crore) by issuing bonds in the foreign market at the rate of 200 basis points over Libor. The road show for the issue will start this week.
Banks such as HDFC Bank, ICICI Bank, Bank of Baroda are also firming up their plans to tap the foreign bond market along with SBI. The other entity includes non-banking finance company, India Infrastructure Finance Company.
“Traditionally, dollar funds have been cheaper than rupee funds,” said Prakash Subramanian K V, managing director, capital markets, Standard Chartered Bank. “But the credit crisis resulted in rising spreads on Indian credits, making it difficult for them to raise dollar funds. Over the last quarter, the dollar markets have shown signs of interest in Indian credits and spreads have also come off substantially,” he added.
Ravi Kapoor, managing director, capital markets at Citi Global Markets India, said spreads had tightened substantially, making the foreign bonds market attractive again. “Companies and banks also need to diversify their funding base,” he said.
“Foreign bonds are also popular for raising resources for over 10-year period,” said Prithvi Haldea, chairman and managing director, Prime Database.

Investment banks in hiring mode

Investment banks in hiring mode
Abhineet Kumar / Mumbai October 10, 2009, 0:56 IST

Demand zooms for expertise in equity, infrastructure & telecom.

Till a few months ago, hiring was a strict no-no for investment banks. On the contrary, they were scaling back staffing plans in India given the dearth of merger and acquisition activity and stagnant capital markets.
That is changing rapidly with a rising number of deals fuelled by strong growth in the markets and an improving economic environment.
As a result, the talent hunt has been resumed, especially for people with expertise in equity markets, infrastructure and telecom. For instance, Citi Global Markets recently hired Bhavna Thakur as head of transactions, capital markets, from Morgan Stanley. Merrill Lynch has selectively started hiring for mid-level positions and Goldman Sachs is recruiting at associate and senior associate levels.
Japan's financial powerhouse, Nomura, which bought 35 per cent in LIC Mutual Fund in July, already employs over 2,600 people in India. It surprised many by issuing half-page advertisements expressing its intent to recruit in large numbers. Many banks have moved to reallocate senior staff from other regions to India.
Apart from the global banks, domestic firms such as Edelweiss filled four positions at vice-president and senior vice-president levels. Yes Bank filled one vice-president position this month.
“The hiring has started very selectively,” confirmed Aditya Sanghi, co-founder and managing director investment banking at Yes Bank.
“Further recruitment may take place with M&A activity gaining momentum,” he added.
“Investment banks have started building their teams in expectation of the deal market picking up," says Ranu Vohra, managing director, Avendus Advisor, a home-grown investment bank.
Avendus has been hiring throughout the year for its new functions such as equity research, but it recently recruited a senior person in the equity markets side and is filling up a leadership-level position for its M&A advisory this month.
Saket Jain, managing partner at Vito India, a specialised head hunting firm for the industry, says investment banks are currently looking for mid- to senior-level executives especially for infrastructure, telecom and financial institution groups.
Indian companies raised about Rs 13,000 crore through initial public offers in the June-September period this year, including those from Adani Power, Oil India and NHPC.
Merchant bankers are expecting over Rs 50,000 crore to be raised in the second half of the current financial year. This has created a lot of demand for the equity capital market function for which Citi hired the transaction head.
The tempo of hiring is expected to pick up from January. Global banks follow the calendar year and top-level hiring for various vertical heads are expected to take off in the January-March period.
http://www.business-standard.com/india/news/investment-banks-in-hiring-mode/372817/

It's the festive season for initial offers, too

It's the festive season for initial offers, too
Abhineet Kumar / Mumbai October 6, 2009, 0:16 IST

September saw 30 companies file prospectuses

The mad rush of 2006 may still be a distant memory, but India Inc is trying hard to make up for lost time as far as raising money from the capital market is concerned.
Last month saw 30 companies filing their draft red herring prospectuses (DRHPs) with the market regulator for initial public offers (IPOs), a sharp increase from six in August and three in July this year. The Securities and Exchange Board of India received eight filings in September last year, the month the Lehman Brothers meltdown brought the world economy to its knees.
Prime Database Managing Director Prithvi Haldea says this year, the September rush is even greater than earlier years because companies are returning to the primary market after a year’s gap.
Enam Securities alone has filed DRHPs on behalf of 10 companies in the last two weeks of September this year. Pankaj Jaju, senior vice-president at Enam Securities, said, “There was almost no activity till June. With the Sensex moving up sharply, there has been a clubbing of DRHPs by all those who have been waiting in the wings for a long time.”
Real estate and infrastructure companies lead the list with nine IPO applications.
These were from companies such as Emmar MGF Land (over Rs 3,500 crore), Sahara Prime City and Lodha Developers. Telecommunication infrastructure provider Reliance InfraTel has announced plans to raise Rs 5,000 crore from the primary markets.
“Overall IPO activity is good now. We can also expect a rush in December,” said Anil Ladha, head, capital markets, ICICI Securities.
Indian companies raised about Rs 13,000 crore through initial public offers in the June- to-September period of this year, including those from Adani Power, Oil India and NHPC. Merchant bankers are expecting over Rs 50,000 crore to be raised in the second half of the current financial year.
Power companies such as GMR Energy, Indiabulls Power and JSW Energy are expected to lead the charge along with public sector companies such as Bharat Heavy Electricals and NTPC.
A Prime Database study found that public sector companies benefit a great deal when they are listed on the stock markets. Four of them — Power Finance Corporation, Power Grid Corporation, Rural Electrification Corporation and NTPC — made valuation gains of up to four times after they were listed.
There are, however, some worry signals. For example, most of the IPOs so far received enthusiastic response, but the stocks’ performance has been lacklustre after listing.
Several of these are trading at a discount to the issue price, raising concerns over whether the issues were priced right.
The encouraging response to the Oil India listing has, however, removed some of those uncertainties.

http://www.business-standard.com/india/news/it/sfestive-season-for-initial-offers-too/372327/