FSS could provide Indian LBO template

Mandated lead arrangers Citigroup and Merrill Lynch are preparing to launch a US$360m seven-year LBO financing for Flextronics Software Systems (FSS) in what will be India’s second LBO, and one that could set the template for future buyout financings. The deal finances KKR’s US$900m buyout of an 83% stake in FSS from Flextronics.

The deal’s structure is keenly awaited because Indian companies are allowed to borrow only for capex and infrastructure financing. This prevents Indian firms from using LBOs, but not foreign companies; however, foreign firms face hurdles in repatriating cashflows and dividends, making classic LBO structures impossible.

Bankers close to the deal said the structure would allow all of FSS’s cashflows to service the loan, even though FSS’s operations are predominantly in India.

A Cayman Island entity will be the borrower, similar to an offshore special purpose vehicle that was the borrower on the US$215m five-year LBO for GE Capital International Services (Gecis) in February 2005 – India’s only other LBO to date.

FSS’s deal will have much higher leverage at 5.8x net debt to Ebitda – although the deal’s all-senior amortising debt will make up just 40% of the capital structure.

Rarity value, and the deal’s 225bp–275bp over Libor margin for a 5.8-year average life, are expected to make the deal attractive. Lenders will also be encouraged by talk that the company will be looking to launch an IPO in a few years, which would provide banks with an exit opportunity.

Flextronics will receive US$600m in cash and will also hold a US$250m note with PIK interest coupon that matures in eight years.