Carlyle Group mulls $1 bn debt raise for Hexaware deal

Private equity firm Carlyle Group is planning to raise $1 billion by issuing dollar bonds to help finance the proposed acquisition of Hexaware Technologies Ltd.

The company looks to issue $1.01 billion notes to fund the acquisition of a 95.42 per cent stake in the Indian IT solutions provider, Moody's Investors Service said in a note on Friday.

Carlyle has set up a special-purpose investment holding company - CA Magnum Holdings (CAMH) - to invest in Hexaware which was been assigned a first-time B1 corporate family rating (CFR) by the rating firm.

Moody's has also assigned a B1 CFR to CAMH's proposed $1,010 million senior secured notes due 2026. The proceeds from the proposed bond sale will be initially held in an escrow account and will be eventually used to fund CAMH's planned acquisition in Hexaware.

"The proceeds from the proposed bond will be initially kept in an escrow account and will ultimately be used to fund CAMH's planned acquisition of a 95.42% stake in Hexaware," Moody's noted.

The rating firm said it analysed CAMH's credit metrics by adding Hexaware's debt and EBITDA into the holding company's proposed debt.

"CAMH's B1 CFR is predicated on its proposed acquisition of a 95.42% stake in Hexaware," said Sweta Patodia, a Moody's Analyst.

"Hexaware's resilient business profile, supported by tailwinds from the pandemic resulting in accelerated digitization of business processes along with its high EBITDA-to-cash-flow conversion and strong liquidity also support CAMH's rating," Patodia added.

What is Hexaware?

Hexaware serves customers in the growing digital solutions segment within the IT services industry, including digital product engineering, digital core transformation, enterprise and next-generation services, cloud transformation and data analytics.

The rating agency noted that in the last few years IT spending by global enterprises on such digital technology solutions has been growing at a much faster pace than traditional business process outsourcing work carried out by IT service providers. It added that the COVID-19 pandemic has accelerated these trends, which has increased the demand for IT services.

This favourable industry environment supports Moody's expectation that Hexaware's operating performance will remain strong and that the company's revenues will grow 14-15 per cent annually over the next 2-3 years, explained the rating agency.

"However, CAMH's CFR also factors in the company's high starting leverage and dependence on dividends from Hexaware for its debt service requirements," Patodia noted.

Moody's expects CAMH's consolidated leverage, as measured by gross debt/EBITDA, to be around six times immediately following the transaction in December 2021.

"This is high for CAMH's current ratings, but Moody's expects its leverage to decline to around 4.7x by December 2023 and around 4.0x by 2024, such that it will be more appropriately positioned for the assigned ratings," read the statement.

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