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RANBAXY HOLDING COMPANY Secured Non-convertible Debentures CARE AA(SO)* Rating CARE has assigned an in-principle ‘CARE

RANBAXY HOLDING COMPANY

Secured Non-convertible Debentures

CARE AA(SO)*

Rating

CARE has assigned an in-principle ‘CARE AA (SO)’ [(Double A (Structured Obligation)] rating to the Non- Convertible Debentures (NCDs) of Ranbaxy Holding Company (RHC) for an amount aggregating Rs.100 crores, backed by the pledge of unencumbered, fully paid shares of Ranbaxy Laboratories Limited (RLL) as collateral in the name of the trustee. The NCDs shall be redeemed in a bullet payment at the end of 21 months from the date of the issue with a call option at the end of 18 months. The interest shall be payable half yearly.

for pledge under the proposed structure, in the event of any breach in the value cover.

To effectively monitor the structure on a daily basis, a trustee would be appointed by RHC. The details of the transaction structure is explained below:

Transaction Structure

The NCDs would have a maturity of 21 months, with a

of of the option.
of
of the option.

bullet repayment at the end of the tenure. The interest would be payable half yearly. Further, the NCDs shall have a call option at the end of 18 months. The option cannot be exercised unless the borrower gives a notice

The rating is based on the strength of collateral, the value and volume triggers designed to ensure timely adjustments in the event of any erosion in the underlying collateral value, and the strength of the structured payment mechanism.

30 days to the lender before the due date of exercise

For the purpose of the enforcement of the structured payment mechanism, RHC shall appoint a trustee.

Background

RHC shall pledge unencumbered fully paid shares of RLL (collateral) in the name of the trustee. RHC will sign an irrerevocable ‘Power of Attorney’ (POA) in favour of the trustees to sell / dispose off the pledged shares, if required.

The proposed NCD issue of Rs.100crores of RHC is secured by the pledge of unencumbered fully paid shares of RLL.

To ensure sufficient availability of RLL shares for the operation of the structure, RHC shall undertake to keep sufficient number of equity shares of RLL free from any encumbrances at all times for the entire tenure of the instrument.

RHC shall also give an irrevocable mandate to the trustee to receive the bonus entitlements on the shares of RLL pledged with the trustee.

A

designated securities firm shall be appointed by RHC

to

undertake the sale of the pledged shares, if required.

RHC shall open a ‘no lien’ Debt Service Reserve Account (DSRA) in its name with a designated bank for the timely servicing of the proposed NCDs.

The timely repayments on the debentures is facilitated by a structured payment mechanism. A debt service reserve account will be maintained for building up the interest and principal payments in advance of the due date, and therefore would allow sufficient time for sale of shares, if RHC is not able to mobilize sufficient funds for the servicing of the NCDs on the due date.

The structure has in-built value and volume triggers to enable timely action in case of any changes in the value and the liquidity of the underlying collateral. To provide further comfort, RHC shall give an undertaking to the trustees, that it would set aside sufficient number of RLL equity shares free from any encumbrances at all times for the entire tenure of the instrument, to be available

RHC shall open a ‘no lien’ Cash Reserve Account (CRA) and a ‘no lien’ Sales

RHC shall open a ‘no lien’ Cash Reserve Account (CRA) and a ‘no lien’ Sales Proceeds Account (SPA) in the name of the trustee with a designated bank(s), which shall be a bank with a subordinate debt rating of AA or higher.

RHC shall also seek a legal opinion to confirm the legal enforceability of the structure from a reputed solicitor.

Value Cover

RHC shall provide a value cover of 3.0 times the net borrowing (i.e. NCD amount less amounts in CRA and SPA, if any). The value cover is defined as the value of shares (share price times the number of shares) divided by net borrowings. The value of share will be worked out using the lower of the following:

Volume triggers

The objective of the volume triggers is to ensure that the collateral can be liquidated before liquidity in the market declines significantly. If the combined trading of RLL shares (in Value terms) on NSE & BSE decline such that the following trigger points are reached, sufficient number of the pledged shares must be sold to fall inside the trigger points once again. The triggers would be measured on a daily basis. However, in order to prevent unnecessary sale of shares for temporary decline in volumes, the sale would be effected after a cure period (including the notice for sale to RHC) stipulated as per the table below.

1) The current share price of RLL (lower of last closing price in NSE and
1) The current share price of RLL (lower of last closing
price in NSE and BSE)
Period
Net
Net
Cure
Borrowing*/
Borrowing* /
Period
Weekly
Monthly
Volumes+
Volumes+
2) Last 52 weeks average (lower of 52 week average
in NSE and BSE)
6
months
25 times
20 times
28 days
6
- 12 months
20 times
15 times
21 days
RHC shall have to maintain a value cover of 2.75-3.0
times at all times during the tenure of the instrument.
12 - 18 months
13.3 times
10 times
14 days
18-21 months
6.67 times
5 times
3 days
The trustee shall monitor the value cover on a daily
basis. In case the lower bound of the value cover is
breached, the trustee shall intimate the company, which
will be required to pledge additional shares of RLL to
restore the value cover to 3.0 times the net borrowings
within 5 working days. However, if the share price of
RLL falls further to a level where the value cover falls
below 2.5times, during this period or otherwise, RLL will
be required to restore the value cover to 3.00 times the
net borrowings within 3 working days or 5 working days
(whichever is lower) of the intimation by the trustee. The
pledge of additional shares shall be acknowledged by
the DPs of both RHC and the trustee.
*
Net borrowings would be Total outstanding borrowings Less any amount
in the cash reserve and the Sale proceeds Account.
+
Daily Average of last 5 working days and last 22 working days
respectively.
Debt Service Reserve Account
To ensure timely servicing of the NCDs, the interest shall
be funded seven working days before the forthcoming
interest due date in the DSRA. Further, the principal
repayments shall be deposited in six equal fortnightly
installments beginning from the 19 th month into the
DSRA.

In order to ensure that the collateral does not become a large proportion of the equity capital of RLL while transferring the shares, a cap of 10% (of RLL’s equity) is imposed on the shares held as collateral. Coverage ratio in such circumstances is to be achieved by selling shares or bringing in additional cash.

In the event, when the value cover exceeds the upper bound of 3.0 times of the net borrowing, the trustee would release the excess shares from the pledge.

In case of any breach in complying with the value or volume triggers or non-funding of the DSRA, the trustee shall affect sale of the pledged shares, through a designated securities firm, to correct the triggers or to fund the DSRA. Under the structure, RHC would expressly agree to a notice period of one day in case of non-funding of interest amounts and non-funding of DSRA for principal repayment and a two days notice for any other performance failure.

Collateral Analysis The value of the collateral and the presence of sufficient liquidity in the

Collateral Analysis

The value of the collateral and the presence of sufficient liquidity in the market to absorb the sale of shares in the market would be the key parameters determining the degree of coverage available to investors.

RLL is one of the major shares on the Indian stock exchanges and is part of both the Sensex and the Nifty. Its market capitalization is among top fifteen of the Nifty. It has good liquidity and low impact costs. The price of RLL’s scrip touched an all time high of Rs.1269/- on 15 th Dec’04.

group companies, Fortis Healthcare Ltd (Fortis) and Specality Ranbaxy Ltd (SRL). These are long term investments and thus the cash flows from these investments would not be available to repay RHC’s debt. Over the longer term, RHC will sell part of its stake in group companies either to strategic investors and / or through an IPO. Thus, all of RHC’s borrowings would need to be refinanced.

RHC has sufficient flexibility in accessing the debt market, given its low indebtedness in relation to the value of investments held by it.

RLL is a leader in the pharmaceutical industry and its performance over the medium term is expected to remain strong. This is expected to give RHL sufficient financial flexibility to refinance the debts.

The average and median volume has been Rs.45.84 crores and Rs.31.28 crores during this period. Given RLL’s market position in the pharmaceutical industry, liquidity and market capitalization, RLL is likely to continue as index scrip.

RISK ANALYSIS

Legal Risk:

The risk of RHC’s bankruptcy affecting the structure is reduced by the pledge of the collateral to the trustee and no lien of RHC’s other creditors over this collateral. The process of invoking a pledge requires intimation to National Securities Depository Limited (NSDL), which can be executed swiftly. For sale of pledged shares, a reasonable notice is required to be given to the pledgor. Under the structure, RHC would expressly agree to a notice period of one day in case of non-funding of interest amounts and non-funding of DSRA for principal repayment and a two days notice for any other performance failure.

In a scenario where RHC defaults on its other liabilities or creditors, who in turn seek the winding up of the company, a cross default clause is incorporated in the structure, which would ensure the liquidation of the collateral by the trustees and prepayment of the investors in such case.

Risk of refinancing the debt of RHC:

RHC’s cash flows are insufficient to repay its current debt obligations and the proposed NCDs. The proceeds of the NCD issue would be used to fund the promoter’s contribution in respect of investment plans of the two

Collateral Risk Value
Collateral Risk
Value

Volume

The major risk in the structure is that the realizable value of the share collateral may fall below the outstanding debt level. The investors in the rated NCD are protected from changes in prices to a great extent through the value triggers, which ensure that the trustee is able to realize sufficient value from the stock in case of adverse price movement. At present, as against the market value of RHC’s stake in RLL of over Rs.4000 crores, the total debt of RHC (including the earlier CARE rated issue of Rs.200 crores and Rs.100crs debt currently being rated) would be only Rs.650 crores. Therefore, the total outstanding debt of RHC to market capitalization of RLL holding in RHC is 14.33%. The level of debt of other investment companies is low.

Liquidity risk arises as a result of volatility in trading volumes and impact costs involved in selling the collateral. The liquidity in RLL counter on both NSE and BSE has been satisfactory and RLL forms part of both the Sensex and Nifty. Sufficient volume triggers are built into the structure to ensure timely action through sale of shares under scenarios of thin liquidity in the stock market. Besides, even in the event of overall markets suffering widespread fall and low

liquidity, the fundamental value and business prospects of RLL are good. Thus, a strategic investor

liquidity, the fundamental value and business prospects of RLL are good. Thus, a strategic investor would be interested in buying a large stake in RLL. This to an extent reduces the dependence on the market liquidity.

Third Party Risk:

Presently, RHC is engaged in loan and investment activities mainly within the Ranbaxy group companies. The company is one of the major shareholders of RLL and holds approximately 23.6% of total issued capital of RLL (4.39crores shares). Out of the total promoter holdings of RLL, RHC’s share is approx. 75%.

As on March 31, 2004, investment in RLL’s shares accounted for 63% of the total assets of the company. Further, exposure to group companies as a proportion of total assets was 31%. As on March 31, 2004, RHC’s secured borrowings of Rs.330 crores are secured by pledge of Ranbaxy shares.

The overall gearing of RHC is at 1.01 times (without deferred tax liability) as on March 31, 2004. The market value of RHC’s holding in RLL at a price of Rs.1,033 per share (52 week average) works out to

Third party risk arises due to the trustee failing to perform his duty on time i.e. weekly marking to market, calling for margins, ascertaining if the requisite amount has been brought in before the due date, and taking appropriate steps to liquidate the shares. The structure is also dependent upon the timely execution of sales orders by the designated securities firm.

Therefore, the appointment of trustees and the securities firm and their experience in discharging similar responsibilities would be crucial to the performance of the structure.

Rs.4,535crores.
Rs.4,535crores.

The main source of income of RHC is the dividend income from RLL. However, this income is not sufficient to service the current debt of RHC. Therefore, the existing debt of RHC is intended to be either refinanced or redeemed from proceeds of divestiture of stake in the group’s ventures and/or of sale of RLL’s shares. However, in FY’04, dividend and interest income was sufficient to meet the interest liability of the company.

Profile of the Issuer

Ranbaxy Holding Company

RHC, incorporated as a private company with unlimited liability in May 1982, is a closely managed company and controlled by the family of Late Dr. Parvinder Singh, the founder and erstwhile CMD of RLL.

For Further details please contact at :

January 2005

CREDIT ANALYSIS & RESEARCH LIMITED

4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (E), Mumbai - 400 022. Tel. : (022) 5554 3456 • Fax : (022) 5554 3457 • E-mail : care@careratings.com

Disclaimer

CARE’s ratings are opinions on credit quality and are not recommendations to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most issuers of securities rated by CARE have paid a credit rating fee, based on the amount and type of securities issued.