The Carlyle Group is all set to acquire a stake in IT solutions provider Hexaware Technologies Limited for which the private equity firm has proposed to raise $1 billion through senior secured notes due 2026. Carlyle has set up a special purpose investment holding company CA Magnum Holdings (CAMH) to invest in the Mumbai-based IT solutions provider.

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 per cent stake in Hexaware.

Moody’s analysis

Moody’s has 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 per cent stake in Hexaware. Hexaware’s resilient business profile, supported by tailwinds from the pandemic resulting in accelerated digitisation of business processes along with its high EBITDA-to-cash-flow conversion and strong liquidity also support CAMH’s rating,” said Sweta Patodia, a Moody’s Analyst.

Digital solutions

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.

In recent years, IT spending by global enterprises on these digital technology solutions has been growing at a much faster pace than traditional business process outsourcing work carried out by IT service providers. The coronavirus pandemic has accelerated these trends, which has increased the demand for IT services.

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“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,” the rating agency said.

“However, CAMH’s CFR also factors in the company’s high starting leverage and dependence on dividends from Hexaware for its debt service requirements,” added Patodia.

CAMH’s consolidated leverage, as measured by gross debt/EBITDA, will be around 6.0x immediately following the transaction (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.