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Sterling Biotech to restructure CBs, selects Houlihan Lokey as advisor

March 27, 2012

Sterling Biotech Ltd plans to restructure its outstanding USD 134.49m zero- coupon convertible bond due 16 May, and has chosen Houlihan Lokey as its financial advisor, three sources familiar with the matter said. The Indian gelatin producer will shortly approach bondholders to ask for an extension of the maturity in exchange for sweetened terms potentially including a coupon, the first source said. The total amount due is USD 183.84m, inclusive of a 36.9% redemption premium. However, Indian secured lenders to Sterling must sign off on any deal, the same source said.

Sterling’s plan to restructure the CBs brings some clarity to the situation after a lengthy period of uncertainty, as information flow from the company ground to a halt following a sharp fall in the stock price amidst reports of a promoter level share-backed facility in default. The subsequent departure of the company’s CFO further obscured matters, and the company secretary insisted only a few weeks ago that it would repay its bonds on time, said two bondholders.

With Sterling’s financials going through a weak phase, that was always going to be difficult, the two holders noted.

Sterling –– a tea plantation operator until 2000 –– had just INR 205.9m (USD 4.1m) in cash and equivalents as of 31 December, down from INR 1.58bn (USD 32m) a year earlier. Over that period, its outstanding debt rose to INR 42.61bn (USD 868m) from INR 37.44bn (USD 763m). The company’s LTM EBIDTA as of 31 December was INR 6.46bn (USD 131.68m), giving it a leverage ratio of 6.59x.

The Sandesara family as of end December has also pledged 55.94% of its 33.91% stake in Sterling Bio, according to company disclosures. The share pledge backed loans that the family raised in the second half of 2011 to increase its stake in the company, according to Indian newspaper reports. The stock closed Monday at INR 9.97 on the Bombay Stock Exchange, down from INR 57 in mid-December.

Bitter medicine
Sterling’s liquidity problems are due in part to a fall in production caused by tougher pollution regulations, said the first source familiar and two other sources familiar. Capacity utilization for the quarter ending December was about 70%- 75%, down from 100% a year earlier, the second two sources familiar said.

Besides weaker production, soft demand from its European and Japanese pharmaceutical clients – which use Sterling’s higher grade gelatin as pill coating – added to the strain, the first source added. The source said that demand was likely to remain weak for at least another quarter.

The combination of the two factors left Sterling falling behind its payments to local secured bank lenders, making a restructuring almost inevitable, the same source said.

Adding to Sterling’s problems was a dispute with Barclays over an underwater derivative deal that the company had not settled on time. Barclay’s subsequently filed a wind-up petition over the dispute, as reported. The unpaid amount is about USD 5m, and will constitute an event of default if the petition is accepted by the court, according to the first source familiar with the matter and another source involved in the case.

Further compounding Sterling’s woes is the fact that much of the company’s cash has been used to finance other Sandesara-family ventures far afield from the India gelatin business, a CB analyst said.

As of 31 December 2010 — the last time the company disclosed the information — Sterling had lent INR 3.95bn (USD 80m) and injected another INR 3.54bn (USD 72m) into three Sandesara-owned entities. One of the investee units owns oil exploration rights in Nigeria, another operates a port in Gujarat, and the third owns real estate in a special export promotion zone industrial park in Gujarat, according to Sterling Biotech disclosures.

In addition to Sterling’s investments, a significant part of the family’s other financial resources were invested in the industrial park project – Sterling SEZ & Infrastructure Ltd. – before a change in the federal tax rules a few years ago and other regulatory hurdles significantly reduced the advantage of such zones, the first source said.

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