On Sept 5, Sembcorp Industries (SCI) announced the proposed sale of Sembcorp Energy India (SEIL) for the equivalent of $2.058 billion or 1x NAV. This so-called purchase price is subject to certain adjustments on and after the date of completion which could either be upwards or downwards, depending on conditions. The purchaser is the Tanweer Consortium led by Oman Investment Corp SAOC; the Ministry of Defence Pension Fund, Oman; and Dar Investment SPC.
SEIL operates two supercritical coalfired power plants totalling 2.6GW in India. Divesting SEIL will kill the proverbial three birds with one stone. SCI will rid itself of a polluting brown asset, lower debt and gearing levels, and still be able to record cash flow from the asset through interest payments from the purchaser, leaving patmi relatively stable.
“One of our 2025 targets was to reduce our greenhouse gas emissions intensity to 0.4 tons of carbon dioxide equivalent per megawatt hour, a 26% reduction from 2020 levels. We have said that to achieve this target, we will explore strategic options for our India coal-fired power plants,” says Wong Kim Yin, group president and CEO of SCI, during a media call on Sept 5.
“The proposed sale of SEIL will enable us to accelerate the transformation of our portfolio from brown to green,” Wong continues.
“We would have met our 2025 greenhouse gas emissions intensity target ahead of time and renewables would constitute 51% of our group’s energy capacity. Post transaction, de-consolidation of SEIL will allow us to strengthen our balance sheet and concentrate our efforts on growing our sustainable solutions portfolio, which is a key focus of our 2025 targets. Chief among that is to grow our renewables portfolio in the target geographies of India, China and Southeast Asia.”
As for the implied value of 1x book value, it is seen as preserving value for shareholders. “There is no impairment, and ebitda, net income and NAV remain stable on a pro forma basis,” Wong points out.
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The deferred payment note
SCI has arranged vendor financing for the Tanweer Consortium via a deferred payment note, or DPN, which will have a 15-year term, that can be extended to a 24-year term with no penalty for non-payment.
As its moniker describes, the payment for SEIL will be deferred and SCI will not get cash upfront. However, SCI will have security via a pledge of shares of the purchasing entity. Instead, SCI will receive interest on the DPN at the rate of 1.8% per annum plus the Indian government’s 10-year bond yield spot rate, for 15 years, less a greenhouse gas emissions intensity reduction incentive.
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SCI’s announcement says, on a pro forma basis, the 1.8% pa plus the Indian government 10-year bond yield spot rate is likely to work out to $157 million (post-tax) of DPN income for the 12-month period ended Dec 31, 2021. Hence, the interest payment from the sale is likely to be similar to the cash flow from SEIL. Hence SCI’s patmi will not be altered too much from the actual FY2021 patmi.
According to SCI group CFO Eugene Chang, the savings for the Tanweer Consortium can be as high as $40 million. In addition to the DPN, SCI has issued corporate guarantees in favour of certain international and local banks in relation to certain existing term loans and working capital facilities linked to SEIL with maturity dates ranging 2022 to 2037, for $740 million, of which $467 million has been drawn down. These guarantees may continue post-completion, SCI’s Sept 5 announcement says.
According to the announcement, all outstanding payment obligations under the DPN should be payable in full on the 15th anniversary date of the completion, which is also the maturity date. If these obligations have not been met, the maturity date will be extended for two years, and for every two years till the monies are paid.
The maturity date will not be extended beyond the 24th-anniversary date of completion. SCI will waive, cancel and forgive the repayment of all obligations by the Tanweer Consortium on the 24th anniversary of completion, and Tanweer Consortium will not be liable for any obligation thereafter. The DPN will terminate on the 25th anniversary date of completion.
“The maximum term of the note corresponds to the end of the asset life. Based on SCI’s assessment, we believe that the principal of the note will be fully repaid within the term of the note. In the unlikely scenario that the principal is not fully repaid by the 15th year, the term of the note can be extended up to 24 years. Sembcorp will forgive the repayment of all obligations by the purchaser and will not take back ownership of SEIL at the end of the term of the note. This is as part of the deal discussed with the purchaser,” an SCI spokesperson explains.
“We feel there is interest, the market seems to be conducive, and we came out with a structure that allows us to support the buyer. The one thing that is weak is lack of financing available to fund investments in coal assets. We came up with this structure to plug this gap,” CEO Wong says. The DPN structure protects the balance sheet as it gets SEIL off SCI’s balance sheet, lowers gearing, yet leaves pro forma patmi relatively unscathed.
Special dividend unlikely
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Since the SEIL sale is not an upfront cash transaction, a special dividend based on the sale is unlikely. “We will be in a better position to raise capital to fund our growth. Capital resources are fungible. This transaction will allow us to transform our portfolio by investing in the green assets that we want to invest in. When our business performs well, we will be able to share more with shareholders through dividends. Our dividend payout ratio has been commensurate with our earnings profile,” Wong replies when asked if there could be a special dividend.
“The proposed sale allows us to accelerate our transition from brown to green, to achieve key objectives and to move forward with a trusted partner, and protect the interests of all stakeholders including lenders. We remain committed to the brown to green journey,” Wong concludes.
The SEIL transaction requires shareholder approval in an EGM which is likely to be scheduled for November this year. The circular for the EGM is likely to be despatched in October and completion is likely to be six months after the EGM.
