India’s leveraged loan market faced a challenging year as the emergence of the COVID-19 Delta variant led to a huge second wave of cases across the country. The spike in infections through the spring saw economic growth forecasts for India scaled back and put the brakes on loan activity.
According to Debtwire Par, syndicated and club loan deals in India fell by 59% year-on-year in the first half of 2021, down from US$14 billion in H1 2020 to US$5.7 billion. This decline is on par with the pause in leveraged and non-leveraged loan activity that took place across South Asia (including India, Bangladesh, Pakistan, Sri Lanka and the Maldives), which is also down year-on-year from US$15.52 billion in H1 2020 to US$5.54 billion in H1 2021.
Milestone loan deals progress
For all the challenges endured by India’s loan issuers, however, debt markets have remained open for high quality credits, and borrowers in the country have had the confidence to continue pursuing landmark financing deals over the last 18 months.
Loan financings for M&A and leveraged buyouts have been a particular bright spot, with acquisition activity in India proving resilient through the pandemic. According to Mergermarket data, M&A and private equity (PE) buyout value in India climbed by 27% and 21%, respectively, between 2019 and 2020 year-on-year. And so far this year, M&A value for H1 2021 is up 12.8% year-on-year, with PE buyout value almost doubling over the same period.
With corporate and PE buyers remaining active, India delivered some sizeable loan financings in the last 12 months, even though overall loan issuance trended downward.
For example, US buyout firm KKR raised a US$206 million loan to support its acquisition of a majority stake in JB Chemicals & Pharmaceuticals. The deal values one of India’s oldest pharmaceutical companies at around US$500 million.
More recently, a consortium of bidders including Blackstone and the Abu Dhabi Investment Authority put together a deal to take a 75% stake in listed Indian IT outsourcer Mphasis in a deal valuing the group at approximately US$2.8 billion. The consortium subsequently entered talks with 13 banks to raise a US$1.1 billion loan deal that will be one of biggest ever in India if it proceeds.
Prospects for chances to fund M&A deals remain broadly positive, as cash-rich global buyout funds and corporates keep looking to India for growth opportunities.
Even though the pandemic has seen GDP growth forecasts reduced, the IMF still expects India’s GDP to grow by 9.5% this year and by 8.5% in 2022, ranking the country among the world’s fastest growing large economies. COVID-19 case numbers have also dropped in recent months (although the risks of further outbreaks remain high), and India’s Sensex stock market index is up 16.5% for the year to date.
India’s lenders and borrowers will hope that with these key indicators stabilizing, M&A activity will continue to flourish and support an uplift in headline loan issuance figures.
Term loan Bs and ESGs
Although M&A activity has been the main highlight, India’s loan markets have been encouraged by growing appetite and interest in environmental, social and governance (ESG) and sustainability-linked debt.
Indian borrowers noted the increasing appetite among global fixed income investors for this kind of issuance and there was a significant rise in the amount of sustainability-linked capital raised by Indian firms this year.
Although sustainable debt raisings have been predominantly undertaken via bond markets, the clear signals of strong investor appetite have opened the door for Indian loan issuers to follow Western markets, where ESG-linked margin ratchets have become a feature of mainstream loan activity.
It is also worth noting that MUFG Bank closed a US$1.35 billion green loan for a renewables project in Rajasthan in March 2021. The loan further underscores the scale of the green and sustainable debt opportunity for India’s firms.
The emergence of term loan B loan structures in India has been another positive development for issuers.
OYO Hotels and Homes, a digital hospitality platform backed by Japanese investment group Softbank, became the first Indian startup to raise a term loan B debt funding package when it secured a US$660 million facility in July. The loan also saw OYO become the first startup in India to receive public ratings from Moody’s and Fitch. The deal was 1.7x oversubscribed, allowing OYO to upsize its package by 10%. The capital was used to refinance existing debt and improve the company’s balance sheet.
OYO’s successful raise of a term loan B—which allows borrowers to pay back a large portion of a loan at the end of its term as opposed to servicing and repaying the debt over the course of its tenure—was noted by other issuers in India and could pave the way for similar structures in the coming months.
After navigating a tricky period for capital markets, Indian issuers found themselves in the favorable position of being able to access wider pools of capital and explore new loan structures to cover their financing requirements.