GMR Infrastructure (GMR) has signed a definitive agreement with Kuwait Investment Authority (KIA) wherein the latter will subscribe to GMR’s 60-year long $300 mn foreign currency convertible bonds (FCCB) due in 2075. The unsecured and subordinated bonds carry 7.5% coupon, payable annually. GMR will utilise the funds to lower corporate debt. Assuming conversion into equity shares at R18/share, the FCCB issue will result in 18% dilution. Hence, we revise our SoTP– based target price to R23 (R27 earlier). Maintain ‘buy’.
GMR has inked a definitive agreement with KIA under which the latter will subscribe to $300 mn (~R20 bn) FCCBs to be issued by GMR. The company will utilise the issue proceeds to retire its high cost corporate debt (R69bn currently). Management is planning to hedge only interest expenses and not the loan as the call option for early redemption is after 10 years.
KIA can choose to convert the bonds into equity after a minimum period of 18 months at INR18/share (~30% premium to the 3–months’ average share price of GMR). Also, if the share price hits R23.4 and stays there consecutively for two weeks, GMR has the right to request KIA to compulsorily convert these bonds into equity.
While lowering of corporate debt is a positive, the large potential equity dilution is a dampener. Favourable policy/regulatory actions, commissioning of power assets and financial restructuring are likely to lead to improvement in GMR’s operational cash flows.
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