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8/14/2019 Cover Story Ecotimes

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Cover Story

Economic Times


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ESSEL PROPACK SETS SIGHTS

ON UKS BETTS


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Overview 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 Englands tube maker Betts After the Essex-based company was placed in

administration, following a breach of bankingagreements

As Betts also is in the same business segment with apresence in markets where the Indian company

doesnt have prominent operations Essel has a global market share of 32% in thelaminated 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 privateequity firm Gresham for 110 million (approximatelyRs 815 crore)

When contacted, Essel Propack declined to commenton the issue. There was no response to an email querysent to Betts

According to international reports, Betts lendersinclude CIT Group, GMAC, Icelands Glitnir andSouth Africas Nedbank


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Contd.. The companys problems were highlighted last year by

its auditors KPMG, which said Betts would be unableto meet its debts unless efforts are made to refinanceloan 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 afterpaying more than 11 million in debt interestpayments, 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-integratedcompanyIn the laminated tube industry, the different verticals

include resin which is the main raw material, films,

lamination and printing


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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


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HULs Q4 net jumps 20% on lower costs HINDUSTAN Unilever, Indias largest FMCGs

company Reported a 20% year-on-year growth in underlying

net profit for the quarter to March, helped by a steepfall 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 60crore towards retirement benefits


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Contd.. After comparing these extraordinary items with those

in the year-ago period, the companys net profit stoodat 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 declinein market share in some categories

A fall in prices and de-stocking by retailers alsoaffected the companys topline


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FCCBs may trip banksMore Guarantor Offshore Banks To Be Hit By

Defaulting Issuers


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Several foreign banks and overseas branches of a fewIndian lenders could be in for a nasty surprise, withlocal companies beginning to default on payments toforeign currency convertible bond (FCCB) holders an event which till the other day was considered onlya distant possibility

Till now, two mid-sized Indian companies apharma firm and an auto component maker havefailed to redeem the bonds


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As the stock prices of these companies crashed, theFCCBs were never converted into shares

So, it was left to the issuers to pay back the money, asin the case of a regular bond, to the FCCB holders. Inthe 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 fullyexposed to the risk through a fancy financial marketinstrument called credit-linked notes (CLNs)


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CLNs, bluntly put, are guarantees against FCCBdefaults

Under the terms, if the Indian company is unable to

redeem, the FCCB holders dont lose out, but bankswhich 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 thecredit 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


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Small cos likely to default on FCCBs The offshore banks, which sell the protection,

subscribe to CLNs and make upfront payment to theFCCB holders

With this deal, the holders of FCCBs shift theirexposure from an Indian company, which may be

perceived to be more risky, to a bank considered morecreditworthy

Roughly about 50% of the FCCBs are backed byCLN agreements. It varies from issue to issue. Banks

and intermediaries, which have sold the protections,could be impacted, said a senior official of a brokinghouse which has advised many FCCB offerings


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Investors, who have not cut CLN deals, would bedirectly 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 billionof outstanding papers

About 400 such issues are set to mature in the next 24months

In an overwhelming majority of these cases, thebonds would have to be redeemed, as they areunlikely to be converted into shares


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While most issuers would be able to honour theircommitments and redeem the bonds, several mid-

sized companies could potentially default

These issuers, like others who had never expected thebull 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 zero-risk game


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Contd.. 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 buyerand 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-marketprovisions on the notes they are holding sincethese notes are traded papers, the difference between

what they earned and what they could have earned ascaptured by the market rate is the MTM loss

In case of a failure to redeem FCCBs, the CLN

investment has to be written off completely

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