Funding transition
For bringing challenging transactions to the onshore and offshore markets, advancing its sustainability agenda in rocky conditions for Asian high yield, while also funding a landmark acquisition, JSW Group is IFR Asia’s Issuer of the Year.
JSW Group, which has energy, infrastructure and cement businesses alongside its flagship company JSW Steel, made use of both onshore and offshore capital markets in 2021 as it tested the limits of both with challenging transactions.
India’s regulations limit the amount lenders can extend to one corporate group, and also restrict the amount issuers can raise from the bond market. As a result, sophisticated issuers like JSW Group are diversifying their sources of funding.
“We are gradually reducing our dependence on the Indian banking system and raising more in the capital bond market in India and overseas,” said Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel.
Around 45% of JSW Steel’s debt is in rupees and 55% in foreign currency. The company is trying to maintain around 10% of its exposure in rupee bonds and 20% in offshore bonds, Rao said.
In 2021, not only did JSW Group fund the acquisition of a distressed company with rupee bonds, but it used the offshore market to bankroll its sustainability journey.
Changes to the country’s bankruptcy and insolvency regime in recent years have encouraged industry consolidation, but the process of acquiring distressed companies is still challenging.
JSW Steel set its sights on Bhushan Power & Steel, eventually receiving the green light from the target’s lenders for its Rs193.5bn (US$2.6bn) resolution plan after a delay of two years.
After winning the bid, it became clear that the acquisition would need a complex funding solution. It was not possible to finance the equity investment through the domestic banking system, nor to enlist private equity investors.
“We were also talking to private equity investors to invest Rs85bn of equity in Bhushan Power & Steel,” said Rao. “However, the lenders did not permit us to bring in a PE investor at that stage, hence, we decided to source this money temporarily from the NCD [non-convertible debenture] market, where NCDs are subscribed by overseas foreign portfolio investors.”
Indian rules stated that companies needed to be in existence for three years before they could issue bonds, but the special purpose vehicle that had been created to acquire Bhushan Power did not meet that requirement. Instead, JSW Group unit West Waves Maritime & Allied Services in March raised Rs25bn from three-year bonds at a yield of 9%.
At the time, West Waves was rated AA– by Icra, but risk aversion in the rupee bond market meant that many investors were reluctant to look at any paper rated below AAA.
Proceeds from the issue were loaned to Piombino Steel, a holding company set up to acquire Bhushan Power. Using the two SPVs made the transaction more tax efficient.
In September, Piombino Steel raised Rs26bn from credit-enhanced zero-coupon bonds due March 2024 at a redemption premium rate of 9%. It used the proceeds to repay the West Waves bond, and then acquired West Waves.
“In the meantime, West Waves is doing very well, and now we don’t need to bring in PE investors,” said Rao.
Having used the onshore bond market for acquisition funding, JSW Group went offshore to finance its sustainability goals.
In May, JSW Hydro Energy brought Asia’s first hydro power project bond, highlighting its green credentials to international investors.
The US$707m 10-year non-call five senior secured green bonds priced at par to yield 4.125%, inside initial guidance of 4.5% area.
The amortising notes had ratings of Ba1/BB+ (Moody’s/Fitch) and a weighted average life of 7.12 years.
The green angle attracted some investors, while others liked the fact that the security over onshore assets was stronger than for many other Indian project bonds. Final orders were over US$2.6bn for the 144A/Reg S deal, including good demand from the US and Europe, as well as orders from high-quality investors like sovereign wealth funds, insurers and pension funds.
Proceeds were used to refinance project debt for JSW Hydro’s 1,000MW Karcham Wangtoo and 300MW Baspa II hydro power plants in the Indian state of Himachal Pradesh. Projects in the pipeline will take the share of renewables in JSW Energy’s portfolio up to 55% from 30% in 2021.
The next offshore transaction made an even bigger splash.
In September, JSW Steel raised US$1bn from a dual-tranche bond offering that included a sustainability-linked tranche, the first time that a steelmaker had sold this kind of instrument.
A US$500m long five-year 3.95% tranche priced to yield 3.95% and a US$500m long 10-year 5.05% SLB priced at 5.05%. The respective initial price guidance was 4.375% area and 5.5% area.
The new notes were rated Ba2/BB– (Moody’s/Fitch), in line with the issuer. Moody’s had changed the outlook on JSW Steel’s rating to positive from stable on September 11, citing a better-than-expected operating performance that helped its deleveraging.
“JSW Group has been raising offshore bonds since 2014 onwards, but we were able to raise only tenors of 5.5 years,” said Rao. “However, with the steps the company has taken in terms of ESG initiatives, we have found out it is possible to raise long tenors if it is an ESG-linked bond, and at good rates. With the first SLB at JSW Steel, we not only got a long tenor, but a good rate, and there was good demand from funds. Investors have appreciated it.”
Investors understandably had a lot of questions before deciding whether to take exposure to a carbon-intensive industry like steel.
JSW Steel aims to cut its net carbon emissions intensity by more than 41% by 2030 from a 2005 baseline, a more ambitious target than India faces under the Paris agreement. The SLB tranche has a one-time 37.5bp coupon step-up if the steelmaker fails to meet its sustainability performance target, which is a 23% reduction of CO2 emissions intensity by 2030 from a 2020 baseline.
“The first point we had to explain to investors is whether the targets we have taken for 2030 are ambitious or not,” said Rao. “Because India is a developing economy, targets cannot be comparable to European countries. The process of steelmaking in India is different and the evolution of the economy is different.
“The target of 1.95 tonnes of carbon emission per tonne of steel from 2.52 tonnes as of March-end 2021 is a tough target for an Indian steel company like JSW Steel to achieve. We took a long time to explain this to investors.”
The deal came in mid-September, less than two weeks before China Evergrande Group’s first late coupon payment that would precipitate its slide into default. Other Chinese developers and Indonesian corporates had already begun to crumble, making issuance in the Asian high-yield bond market extremely difficult.
Against this background, it was ambitious to bring a long-tenor SLB, a product that had been seen only a handful of times in Asia’s US dollar bond market at that point, yet the decision paid off. Orders were over US$4.7bn from 245 accounts, with fund managers driving the deal.
Not only did JSW Group manage to meet its funding objectives successfully in 2021, but it also used the capital markets to advance its sustainability agenda.
In November, JSW Steel was one of 15 Indian companies picked to join the S&P Dow Jones Sustainability Index for emerging markets, showing that it has managed to balance business growth with a reduction in its environmental impact.
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