On the first day of Coal India’s much awaited $3.5bn share sale, which is set to be the country’s biggest IPO ever, the state-owned miner attracted $1.2bn of bids on Monday: a decent start for an offer that will close on Wednesday for institutional investors, and a day later for retail buyers.
In India most bids tend to come in on the final day. That’s why the optimistic bankers working on the deal predict it will be ten times over-subscribed. Investors, it seems, are expecting the shares to perform strongly on the back of growing demand for energy globally.
Small wonder there’s a mini M&A boom at the moment – just at look at the cost of borrowing for big, stable companies like BHP Billiton.
Citigroup reckons the $45bn credit facility put in place by the miner to finance its hostile offer for PotashCorp is likely to be just 3-4 per cent.
Key conclusion is that funding cost at current rates will initially be <2% (3 month LIBOR ~33bps, 1 year ~91bps), but this is likely to increase to 3-4% as the US$25b “bridge” loan is termed out to 5 to 10 year fixed rate via the corporate bonds.
We were assuming a cost of funding for the deal of closer to 5%, which would have created an annual interest bill of around $2.1bn; we estimate the above facilities could drop the cost of funding by at least $1bn in the short term.
Obviously, the 3-4 per cent figure needs to be put in the context of sub-3 per cent 10-year US government bond yields and the Fed’s near zero interest rate.