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Bain Capital to lead $1.8 bn fund infusion in Axis Bank

10 November, 2017

US-based global alternative investment firm Bain Capital, state-run Life Insurance Corporation and investment management firm Capital Group will acquire Axis Bank shares and convertible warrants worth a total of Rs 11,626 crore ($1.8 billion).

Mumbai-based Axis Bank will issue 172.6 million fresh preference shares and 45.4 million warrants (carrying an option to subscribe to an equivalent number of shares) to the investors, the lender told stock exchanges on Friday after a board meeting. It will allot shares at Rs 525 apiece and warrants at Rs 565 apiece.

Preference shares are shares that carry certain special or priority rights. Holders of preference shares, for instance, receive dividends before holders of common stock.

The fundraising will help India’s third-largest private-sector lender shore up its capital in the wake of mounting bad loans and deteriorating profitability.

The share sale represents 6.6% upfront dilution. Adding warrant conversion will result in a total in eventual dilution of 8.2% stake.

Bain Capital—through its investment arms, BC Asia Investments and Integral Investments South Asia—will acquire a total of 87.5 million preference shares besides 40 million convertible warrants worth Rs 6,853.75 crore ($1.05 billion).

The purchase will give Bain Capital 4.87% of expanded capital after converting warrants into equity, besides getting one board seat on Axis Bank’s management for four years.

This would make the PE firm the second-largest shareholder after the government whose holding will adjust to 27.3% taking into account the share allotment to LIC.

Government’s stake through various state-owned firms like New India Assurance and LIC stood at 30.35% at the end September 2017-quarter. Its holding would have declined to 26.21% had LIC not participated in the preferential allotment.

LIC will buy 30.15 million shares worth Rs 1,583.34 crore, according to the filing.

Capital Group, through its four funds, is set to acquire 48.97 million shares and 5.35 million warrants, resulting in an investment of Rs 3,188 crore ($490 million).

Bain Capital had perceived that Axis Bank’s stock is slightly stressed and hence less expensive to acquire, while Axis Bank could potentially use the funds to meet capital requirements.

JP Morgan advised Bain Capital, while Axis Capital advised Capital World on their respective share purchases in Axis Bank.
Reserve Bank of India (RBI) norms allow investors to pick up a stake of only 5% in private-sector lenders. Any acquisition over that threshold needs the apex bank’s approval, as per RBI guidelines.

Axis Bank
In its latest earnings report mid-October, Axis Bank said its NPAs rose to Rs 27,402 crore in the July-September quarter from Rs 22,031 crore in the April-June quarter this year.

Gross and net NPA ratio stood at 5.90% and 3.12%, respectively.

Its stock declined 15% on the back of its earnings report. The stock has recouped all its losses after the fall last month. Axis Bank shares on the BSE closed at Rs 544.50 apiece on Friday, up 0.7% from the previous close. It has touched a high of Rs 555.55 and low of Rs 424.60 per share in the previous 52 weeks.

Domestic and foreign brokerages remain concerned over the bank’s loan book and mounting non-performing assets, but expect its asset quality and earnings to normalise and improve.

Bank of America Merrill Lynch (BAML) estimated an additional Rs 12,000 crore ($1.8 billion) slippages in the second half of FY18.

“We cut EPS forecasts fiscal 2018 and 2019 but good retail franchise value will drive back return on equities by fiscal 2019 and 2020,” BAML said in a client note.

CLSA also expects Axis Bank’s asset quality and earnings to normalise, highlighting pick-up in loan growth and healthy CASA (current account savings account) growth as key positives from the bank’s latest earnings report.

The bank’s corporate loan book grew by 10%, led by working capital loans. The bank reported a profit of Rs 432.38 crore compared with Rs 319.08 crore a year ago and Rs 1,305.60 crore a quarter ago.

Bain Capital’s portfolio
The PE firm’s latest holdings were immediately available. It has assets under management worth around $75 billion, according to its website.

The firm was founded in 1984. It provides growth, late and buyout stage capital to companies operating across the globe. The firm seeks to invest in energy, retail, consumer products, business and financial services, manufacturing, healthcare, technology, media and telecom sectors.

Reuters reported in September that Bain Capital made the first close to its Asia credit fund, raising $557 million as the private equity firm looks to scoop up distressed debt in China and other countries in the region.

Bain Capital Special Situations Asia LP, as the fund is called, tapped 38 investors so far for the fund, according to a filing with the U.S. Securities and Exchange Commission dated 5 September.

The firm was looking to raise $1 billion for its first Asia-focused credit fund to capitalise on distressed debt and direct lending opportunities.

It entered into Chinese distressed debt in May, buying a portfolio of real estate non-performing loans (NPLs) worth $200 million in principal from China Huarong Asset Management Co Ltd, the country’s biggest distressed debt manager.

Bain’s share purchase in Axis Bank is a growing indication of interest among large global investors seeking to acquire stakes in Indian lenders despite the banking sector’s perceived stress.

For instance, Catholic Syrian Bank has attracted interest in the past from SSG Capital Management and Fairfax Holdings.

Canadian investors CPPIB and CDPQ have made large-sized bets on Kotak Mahindra Bank.

In 2015, Bain acquired around 5% stake in L&T Finance Holdings Ltd from Larsen and Toubro Ltd (L&T) for Rs 600 crore ($90 million), besides having an option to acquire 5.27% stake more through a preferential allotment worth Rs 708 crore (approximately $107 million).

The PE firm has teamed-up with other large strategic investors in picking significant stakes in Indian companies. Previously, it has done deals worth $500 million to $1 billion with GIC for picking up sizable stakes in Genpact and Hero MotoCorp.

GIC is already an investor in Axis Bank as is Abu Dhabi sovereign wealth fund, with both investors holding 1.34% and 1.23% stake, respectively.

Cinnamon Capital, the investment arm of Singapore-based Clermont Capital owned New Zealand-based billionaire Richard Chandler, owns 1.99% stake in Axis Bank.

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Bain Capital to lead $1.8 bn fund infusion in Axis Bank

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