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Carlyle set to raise $1 billion debt for big Hexaware buyout

MUMBAI :

Private equity firm Carlyle will raise $1 billion in debt through an offshore bond issuance to finance its almost $3 billion acquisition of IT services firm Hexaware Technologies. The proposed debt offering by CA Magnum Holdings (CAMH), a special-purpose investment holding company set up for the acquisition, has been assigned a B1 rating, international rating agency Moody’s said in a note on Friday.

B1 rating is a below investment grade rating. The bonds are due in 2026.

Mint first reported on 5 September that Carlyle was in talks with banks to raise $1 billion debt to finance the Hexaware buyout.

“The proceeds from the proposed bond will be initially kept in an escrow account and will ultimately be used to fund CAMH’s planned acquisition of a 95.42% stake in Hexaware. Should the proposed acquisition not proceed as planned, CAMH will redeem the bonds in full along with any accrued and unpaid interest by largely using the proceeds in the escrow account,” Moody’s said.

CAMH’s rating reflects the credit quality of Hexaware as Hexaware will be the only source of cash flows to service its debt obligations, the rating agency added.

“Hexaware’s resilient business profile, supported by tailwinds from the pandemic resulting in accelerated digitization of business processes along with its high Ebitda-to-cash-flow conversion and strong liquidity also support CAMH’s rating,” said Sweta Patodia, a Moody’s Analyst.

Hexaware serves customers in the growing digital solutions segment within the IT services industry, including digital product engineering, digital core transformation, enterprise and next-generation services, cloud transformation and data analytics.

In line with rising demand for such services, Moody’s expects that Hexaware’s operating performance will remain strong and that the company’s revenues will grow 14%-15% annually over the next two to three years, the rating agency said.

“However, CAMH’s rating also factors in the company’s high starting leverage and dependence on dividends from Hexaware for its debt service requirements,” said Patodia.

According to Moody’s CAMH’s consolidated leverage, as measured by gross debt/Ebitda, will be around 6.0x immediately following the transaction (December 2021). This is high for CAMH’s current ratings, but Moody’s expects its leverage to decline to around 4.7x by December 2023 and around 4.0x by 2024.

Moody’s expects Hexaware’s Ebitda to improve to around $233 million by 2023 from around $179 million in 2021.

Hexaware reported revenues of around $919 million for the 12 months ending September 2021.

The company also has an opportunity to win new business from Carlyle’s other portfolio companies, which collectively spend around $1 billion on IT services each year, Moody’s said.

“As of 30 September 2021, Hexaware had cash and cash equivalents of around $189 million, compared with a total debt of $23 million. Moody’s expects a steady cash build up on the balance sheet as the company will continue to generate $80 million-$90 million in cash flow each year (after accounting for the interest expenses on the bond) while capital spending needs will be minimal and limited to around 2% of revenues The ratings incorporate Moody’s expectation that CAMH will not extract any additional cash from Hexaware apart from regular dividends required to service the interest obligations on the bond, such that Hexaware will maintain its financial flexibility,” the rating agency said.

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