On Sept 5, Sembcorp Industries (SCI) announced the proposed sale of Sembcorp Energy India Ltd (SEIL) for the equivalent of $2.058 billion, or 1.0x NAV. This so-called purchase price is subject to certain adjustments on and after the date of completion which could either be upwards or downwards depending on condition.
The purchaser is the Tanweer Consortium led by Oman Investment Corporation S.A.O.C. (OIC), the Ministry of Defence Pension Fund, Oman (MODPF) and Dar Investment SPC (Dar Investment).
SCI has issued corporate guarantees in favour of certain international and local banks in relation to certain existing term loans and working capital facilities with maturity dates ranging from 2022 to 2037, for $740 million of which $467 million has been drawn down. These guarantees may continue post-completion, SCI’s announcement says.
On completion, Tanweer Consortium will settle the entire final purchase price by way of the Deferred Payment Note (DPN) via a facility provided by SCI under the DPN. The DPN will bear interest at a rate per annum equal to 1.8% plus a benchmark rate equal to the Indian government 10-year bond yield spot rate, minus a greenhouse gas (GHG) emissions intensity reduction incentive rate (GHG Reduction Incentive Rate). This GHG Reduction Incentive Rate can be as high as $40 million according to SCI's management, that is, Tanweer Consortium could save $40 million in interest payment if SCI achieves certain emission targets for SEIL.
All outstanding payment obligations under the DPN should be payable in full on the 15th anniversary date of the completion, which is also the maturity date. If these obligations have not been met, the maturity date will be extended for two years, and for every two years till the monies are paid. The maturity date will not be extended beyond the 24th anniversary date of completion.
SCI will waive, cancel and forgive the repayment of all obligations by the Tanweer Consortium on the twenty-fourth anniversary of completion and Tanweer Consortium will not be liable for any obligation thereafter. The DPN will terminate on the 25th anniversary date of completion.
When asked for clarification, an SCI spokesperson says: "The maximum term of the note corresponds to the end of the asset life. Based on SCI’s assessment, we believe that the principal of the note will be fully repaid within the term of the note. In the unlikely scenario that the principal is not fully repaid by the fifteenth year, the term of the note can be extended up to 24 years. Sembcorp will forgive the repayment of all Obligations by the Purchaser and will not take back ownership of SEIL at the end of the term of the note. This is as part of the deal discussed with the Purchaser."
CGS-CIMB points out that the DPN is a form of vendor financing. "The $2.058 billion DPN principal will be booked as long-term receivables. Interest income will be booked as non-operating income in Ebitda, not as a below-the line item. SEIL will be de-consolidated from SCI’s books on a line-by-line basis. As such, SCI’s net gearing will be reduced accordingly. There are around $700 million in receivables that past due from both Telangana and Andhra Pradesh DISCOM that will be de-consolidated. The Indian Ministry of Power has recently directed both DISCOMs to settle the overdue payments over 20-48 months. If adhered to, the cashflows will form part of the repayment for SCI," CSG-CIMB says in its update.
“We feel there is interest, the market seems to be conducive and we came out with a structure that allows us to support the buyer," says SCI president and CEO Wong Kim Yin.
"The one thing that is weak is the lack of financing available to fund investments in coal assets. We came up with this structure to plug this gap,” he says, adding that the proposed sale will enable SCI to achieve some of its targets – to decarbonise, to deconsolidate, and to protect its balance sheet and the interests of investors, employees, lenders and so on.
“The proposed sale allows us to accelerate our transition from brown to green, and allows us to achieve key objectives and to move forward with a trusted partner, and protect the interests of all stakeholders including lenders. We remain committed to the brown to green journey,” Wong says. He adds that the transaction is subject to an EGM.
Sembcorp shares closed at $3.33 on Sept 5, up 0.3% for the day and up 65.67% year to date.