Cover Story: Economic Times

Economic Times

Cover Story

ESSEL PROPACK SETS SIGHTS ON UK’S BETTS

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ESSEL Propack, a laminated tube maker catering to oral care and FMCG products worldwide It is exploring the option of picking up a controlling stake in England’s tube maker Betts After the Essex-based company was placed in administration, following a breach of banking agreements As Betts also is in the same business segment with a presence in markets where the Indian company doesn’t have prominent operations Essel has a global market share of 32% in the laminated tubes segment with units across the world, while Betts accounts for nearly 14%.

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The company had been acquired in 2007 by private equity firm Gresham for £110 million (approximately Rs 815 crore) When contacted, Essel Propack declined to comment on the issue. There was no response to an email query sent to Betts According to international reports, Betts’ lenders include CIT Group, GMAC, Iceland’s Glitnir and South Africa’s Nedbank

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The company’s problems were highlighted last year by its auditors KPMG, which said Betts would be unable to meet its debts unless efforts are made to refinance loan facilities and new covenants are agreed Betts reported a pre-tax loss of £7.7 million in the 200 days to last March on revenues of £49.7 million after paying more than £11 million in debt interest payments, according to foreign agency reports Betts had group debts of £94.1 million The acquisition of Betts, a pure tube player, would be a perfect fit for Essel Propack, a vertically-integrated company  In the laminated tube industry, the different verticals include resin which is the main raw material, films, lamination and printing

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Betts is essentially a tube player that buys resin from outside, the benefits of such an acquisition would be high since Betts can buy resin from Essel Essel has been growing inorganically through acquisitions Essel acquired US-based Catheter and Disposables Technology, a supplier of specialised medical disposable devices

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Essel has units in the US, Mexico, Colombia, the United Kingdom, Poland, Germany, Egypt, Russia, China, among others These facilities make products for oral care, cosmetics, personal care, pharmaceuticals, food and industrial sectors

HUL’s Q4 net jumps 20% on lower costs  

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HINDUSTAN Unilever, India’s largest FMCGs company Reported a 20% year-on-year growth in underlying net profit for the quarter to March, helped by a steep fall in raw material prices The Indian subsidiary of Anglo-Dutch multinational, Unilever, posted a net profit of Rs 457 crore for the period, after excluding extraordinary items The company made a one-time provision of Rs 107.1 crore for exceptional items, which include Rs 60 crore towards retirement benefits

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After comparing these extraordinary items with those in the year-ago period, the company’s net profit stood at Rs 395 crore, 3.7% higher than the figure for January-March 2008 Total income grew by just 5% during the period to Rs 3,988 crore after the company registered a decline in market share in some categories A fall in prices and de-stocking by retailers also affected the company’s topline

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The company has managed to improve its operating profit margin and almost maintain its net profit margin Its operating profit margin was 15%, 200 basis points more than in the year-ago period The net profit margin, excluding the effect of extraordinary loss, also saw a rise of 140 bps to 11.3% In sequential terms, however, the company has reported the worst quarter in fiscal 2009

FCCBs may trip banks More Guarantor Offshore Banks To Be Hit By Defaulting Issuers

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Several foreign banks and overseas branches of a few Indian lenders could be in for a nasty surprise, with local companies beginning to default on payments to foreign currency convertible bond (FCCB) holders — an event which till the other day was considered only a distant possibility Till now, two mid-sized Indian companies — a pharma firm and an auto component maker — have failed to redeem the bonds

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As the stock prices of these companies crashed, the FCCBs were never converted into shares So, it was left to the issuers to pay back the money, as in the case of a regular bond, to the FCCB holders. In the case of these two companies, they failed to do so These defaults have rattled several offshore banks, which, though not direct holders of FCCBs, are fully exposed to the risk through a fancy financial market instrument called credit-linked notes (CLNs)

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CLNs, bluntly put, are guarantees against FCCB defaults Under the terms, if the Indian company is unable to redeem, the FCCB holders don’t lose out, but banks which have subscribed to CLNs take the hit This is how it works:  Overseas

investors holding the FCCBs buy protection, and in the process issue CLNs — notes, or bonds, linked to the credit of the Indian issuer concerned — to offshore banks, many of which are foreign branches of Indian banks

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This transaction is popular among FCCB investors who are not comfortable taking an exposure to little-known Indian companies

Small cos likely to default on FCCBs 

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The offshore banks, which sell the protection, subscribe to CLNs and make upfront payment to the FCCB holders With this deal, the holders of FCCBs shift their exposure from an Indian company, which may be perceived to be more risky, to a bank considered more creditworthy “Roughly about 50% of the FCCBs are backed by CLN agreements. It varies from issue to issue. Banks and intermediaries, which have sold the protections, could be impacted,” said a senior official of a broking house which has advised many FCCB offerings

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Investors, who have not cut CLN deals, would be directly impacted by the defaults Indian corporates have raised $15 billion through largely unsecured FCCBs in the past five years Bonds worth $4 billion have either matured or have been bought back by promoters, leaving $11 billion of outstanding papers About 400 such issues are set to mature in the next 24 months In an overwhelming majority of these cases, the bonds would have to be redeemed, as they are unlikely to be converted into shares

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While most issuers would be able to honour their commitments and redeem the bonds, several midsized companies could potentially default These issuers, like others who had never expected the bull market to end abruptly, had felt that the bonds would get automatically converted into equity Driven by a similar logic, banks, too, believed that selling protection through the CLN route was a zerorisk game

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“In a few cases, FCCB issuers take a standby guarantee from another bank, which will chip in if the issuer defaults. However, this is rare and most deals are CLN pacts between FCCB investors and other big banks,” said a senior banker “There is hardly any recourse left to the CLN buying bank if the FCCB issuer defaults...In most cases, the clauses in the contracts between the protection buyer and the protection seller are not strong enough to ensure this,” said the CEO of a financial institution

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The CLN banks are already making mark-to-market provisions on the notes they are holding — since these notes are traded papers, the difference between what they earned and what they could have earned as captured by the market rate is the MTM loss

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In case of a failure to redeem FCCBs, the CLN investment has to be written off completely