GVK Power and Infrastructure's multi-billion dollar acquisition of Hancock Coal is facing last-minute jitters, as lenders financing the deal are scaling down their exposure.
According to two independent sources in the know, GVK's lead underwriter, ICICI Bank, plans to reduce its exposure in the highly leveraged transaction. Following the move, the other PSU lenders have told GVK they, too, would like to proportionately bring down exposure.
This has resulted in a $250-million shortfall to be bridged. GVK needs to pay $1.25 billion upfront to Hancock owner Gina Reinhart, the richest woman in Australia, for two mines, Alpha Coal Project and Kevin's Corner, located in the coal-rich Galilee Basin of Queensland, Australia.
Subsequently, GVK was to pay another billion dollars. GVK also had to infuse fresh debt to develop mining assets and build the necessary evacuation infrastructure. The entire project cost was estimated at a whopping $8 billion (Rs 36,800 crore).
Sources in the know said of the initial payouts, ICICI Bank had agreed to bankroll around $625 million. A consortium of lenders such as Bank of India, Bank of Baroda and Canara Bank was brought on board after Axis and Standard Chartered opted out of the funding negotiations. Together, these three banks were to put up another $625 million.
While Bank of India had the highest exposure at $400 million, Bank of Baroda and Canara Bank were financing $125 million and $100 million, respectively.
But in the final negotiations with the lenders, ICICI has agreed to fund up to $500 million, according to sources in the know.
Similarly, the three lenders have decided to scale down and pay only another $500 million. "So, there is now a shortfall of $250 million. Either GVK has to get an equity partner or somebody has to give an undertaking. The problem is time is short and existing partners in the consortium will have to go back to their respective boards to seek permission to hike their exposure," said a source familiar with the ongoing talks.
Sources said for the time being, GVK was proceeding with the documentation for the deal, and parallely trying to settle its acquisition financing strategy.
ICICI Bank's spokesperson and GVK's CFO Isaac George both declined to comment on the issue.
It is still not clear why the lenders are having second thoughts at the last minute. From a macro perspective, the windfall tax on mining in Australia has negatively impacted sector's prospects.
On
a micro level, the high leverage in the deal, according to most bankers, has been a cause of concern. GVK's listed flagship GVK Power and Infrastructure Limited (GVKPIL) - which houses its energy and infrastructure verticals - has a current market cap of only Rs 2,708 crore (Rs 27.08 billion).
In the beginning of April, when GVK entered into exclusive negotiations with Hancock's management, the market cap was Rs 4,461 crore (Rs 44.61 billion).
Even as compared to many of its infrastructure peers GVK's debt equity ratio is better, most peg the Hancock transaction as "too ambitious for a company the size and scale of GVK." Its other businesses like power and airports need cash too.
Last month, GVK had to shell out Rs 614 crore (Rs 6.14 billion) to buy an additional 14 per cent stake from Siemens in the Bangalore Airport to emerge as the largest shareholder.
Most analysts predict an earnings dilution of seven per cent as the transaction is also debt funded and the interest outgo would be high in the coming quarters.
Similarly, GVK has already diluted equity and brought in a clutch of equity investors like 3i India Infrastructure Fund, Singapore-based GIC and Actis for its power generating arm.
According to some officials, the banks wanted the promoter's holding in GVKPIL as a backstop.
GVK was to form an overseas special purpose vehicle (SPV) in Singapore for the Hancock deal. This SPV was to act as the holding company of the Australian assets.
Sources added that GVK was also engaged in parallel negotiations with GIC of Singapore for an equity investment in the SPV to bring down the leverage.
Hancock Coal has two mines, Alpha Coal Project and Kevin's Corner, in the coal-rich Galilee Basin in Queensland. The assets, which were put on the block early this year, have combined reserves of around eight billion tonnes of thermal coal.
The life of these mines is estimated to be around 30 years. Alpha Coal has around 3.6 billion tonnes of measured, indicated and inferred compliant coal, is an open-cut mine, and is the bigger of the two mines.
Kevin's Corner, which is currently under development, is estimated to produce as much as 30 million tonnes per annum.
The mine is known to be tough to extract coal from, and construction is expected to start this year; production is expected to start in the latter part of 2013.
Both mines require huge investments in rail and port infrastructure, and these investments too have to be made by GVK group, if it buys the mine.
Apart from others, the mines require a dedicated multi-user rail system, a port with coal handling facilities and a stockyard.