In This Issue:
- Editor’s Column – Equity Small & Mid Cap Jitters, Will it Impact High Yield Markets?
- Fortis Healthcare – The dangers of investing in holding companies
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
The last few months have seen a sell off in mid and small cap stocks, with many of them falling by 30% to 40%. Will the sell off in mid and small cap stocks affect the high yield market?, as many issuers in this market have lower credit ratings and issue bonds at higher yields.
The equity and high yield market do have a correlation, sometimes very strong. The relationship works both ways, companies that are raising debt for capex or working capital are seeing good traction in their businesses and that leads to higher valuations in the equity market. Higher equity valuations provide companies access to equity funding, which improves their balance sheet ratios and that leads to prospects of rating upgrades. High yield markets primarily look at potential rating upgrades as that provides the spread compression, which compensates for the risk of investing in high yield bonds.
Fall in equity valuations and weak equity market sentiments may lead to lack of access for equity funding for lower rated issuers and this could deter demand for high yield bonds in the market. Fall in equity valuations also could suggest a downturn in the business and economic cycle and that would mean that lower rated issuers may see falling growth prospects affecting their ability to service debt.
The question to ask is whether the fall in equity valuations currently is signalling a business or economic downturn or is it a market correction, given that many stock prices rose to record highs before falling sharply?
The current fall in equity valuations is a market correction, going by business and economic indicators and growth prospects are looking bright. On the economy front, indicators such as industrial production, trade, tax collections, vehicle sales, air traffic and other high frequency indicators are showing a positive trend. On the business front, many mid and small cap companies, whose stock prices have fallen in this correction, are showing strong results and managements are providing optimistic guidance.
The high yield market too has not reacted negatively to the recent equity market fall, there is strong demand for bonds of lower rated issuers and that in itself shows that companies are borrowing for businesses expansion and growth. Ratings too have not see any major negative revisions over the last few months.
Demand for high yield bonds is set to continue and more and more issuers will access this market going forward as banks are still credit risk averse given their NPA issues.
Search for Yields will actively cover high yield issuers and try to disseminate as much relevant information and analysis as possible to improve efficiency in the nascent high yield market in India.
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Fortis Healthcare – The dangers of investing in holding companies
Fortish Healthcare is seeing a lot of bidding interest but even if the company passes on to strong hands, bondholders and lender of promoter holding companies are not going to see any benefits, The lenders against pledged shares of Fortis Healthcare have invoked the pledge and currently own a large stake in the company.
The promoters have borrowed through a myriad of companies and raises issues of how these companies can pay back the lenders. The Fortis issue is a lesson for bond investors who do not do enough due diligence in investing in holding companies.
Latest Credit Rating of Fortis Healthcare
The long-term rating for Rs. 2.5 billion non-convertible debenture programme, Rs. 1.05 billion fund-based limits and Rs. 1.95 billion term loans have been revised from ICRA BBB- to ICRA C. Further, the short-term rating for Rs. 6 billion commercial paper programme and Rs 0.2 billion non-fund-based facilities have been revised from ICRA A3 to ICRA A4. The ratings have been removed from a watch with negative implications.
Fortis Healthcare – Key Factors.
Established branded healthcare provider in India, FHL is one of the largest healthcare services providers in the country with 4600 beds spread across 45 healthcare facilities (including projects under development) and over 346 diagnostic centres.
Positive demand outlook for healthcare services in the country due to growing awareness of healthcare issues, under-served nature of the sector, better affordability through increasing per capita income and widening medical insurance coverage.
Fortis Healthcare has been reducing debt by selling off its international operations and focusing more on the Indian business. Its consolidated debt level has fallen to Rs 14 billion in FY-18 from Rs 19 billion in FY-17.
Fortis also plans to buy back assets from Religare Health Trust, the buy back being funded via a mix of debt and equity. Earlier Fortis Healthcare sold these assets for about Rs 23 billion to the trust in October 2012 to de-leverage its balance sheet. Under an asset-light model, it then leased back the hospitals. Fortis has now decided to return to the conventional model under which it will own the assets. That will help Fortis Healthcare save on service fees and interest costs, which will have a positive impact on EBITDA.
Given that current promoter holding is marginal (less than 1%), the board is looking to find a new investor, which could be the game changer.
The board opened the company for bids and selected a successful bidder, but was then accused of bad corporate governance practice. Three board members resigned and another was asked to leave. Three new board members were inducted and a fresh round of bidding announced.
Recently, Fortis board has decided to include Hero Enterprise Investment Office-Burman Family Office (Dabur) consortium, IHH Healthcare Berhad, Radiant Life Care backed by US private equity firm KKR and the Manipal-TPG consortium in the bidding process. According to the new criteria, the buyers will have to make a minimum investment of Rs 15 billion in Fortis Healthcare by way of preferential allotments, apart from having a plan for funding the acquisition of RHT Health Trust and another for providing an exit to PE investors.
Fortis Healthcare- Risk Factors
Auditors have raised red flags on related party loans and inter-corporate deposits.
Fortis Hospital Limited (FHsL), a wholly owned subsidiary of the group, had placed inter-corporate deposits for a period of 90 days with three companies, which were not related to the group. Later on, these companies became part of the group and the transactions were termed as related-party transactions.
The Supreme Court has paved the way for the sale of Fortis Healthcare shares pledged to lenders by former board members Malvinder and Shivinder Singh. Earlier, the apex court had blocked the sale of all Fortis Healthcare shares owned by Fortis Healthcare Holding Pvt Ltd. (FHHPL). This allows Yes Bank, Axis Bank, Indiabulls Housing Finance to sell Fortis Healthcare shares pledged to them by the Singh brothers.
As of March 2018, Yes Bank holds 15.14%, Axis Bank holds 1.76% and Indiabulls Housing Finance holds 2.98% in Fortis Healthcare Ltd.
Fortis Healthcare Limited (FHL) was promoted by late Dr. Parvinder Singh. The company commenced its operations with the opening of its first hospital at Mohali in 2001. Since then, the Company has expanded its operations, both organic and through acquisitions. It now has 45 healthcare facilities, operational bed capacity of 4600 beds and the potential to reach around 10,000 beds. Further, through its subsidiary, SRL Limited, the company operates 346 diagnostic centers in the country.
Above given bonds are offered by Derivium Tradition Securities (India) Pvt. Ltd on 28th June
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