India Ratings and Research (Ind-Ra) has placed Ballarpur Industries’ (BILT) Long-Term Issuer Rating of 'IND A+' on Rating Watch Evolving (RWE).

The RWE follows BILT's announcement of entering into a share sale agreement with Pandawa Sakti (Sabah) Sdn. Bhd., Malaysia (purchaser)   for the divestment of its entire stake of 98.08% in its step-down subsidiary Sabah Forest Industries (SFI), Malaysia at an enterprise value of USD 500 million.

This agreement is subject to necessary adjustments (on the date of closing) relating to debt, working capital, currency fluctuation and cash & cash equivalents. Pandawa Sakti (Sabah) is a subsidiary of Pandawa Sakti Sdn. Bhd. Malaysia and Pandawa Sakti.

The sale is likely to be completed within three months of the date of signing the agreement. According to the announcement, the completion of the transaction is subject to necessary approvals from the government of Malaysia, SFI's lenders and the completion of certain obligations by the purchaser. In addition, a significant part of the consideration is proposed to be used for debt reduction at the level of SFI, Bilt Paper B.V. and Bilt Graphic Paper Products (BGPPL).

Ind-Ra expects the sale to improve BILT's margins in the near term as SFI reported operating EBITDA margins of 5.1% in FY15 (FY14: 12.9%) as against BILT's consolidated EBITDA margins of 15.7% (17.8%). The sale is also likely to result in the deleveraging of BILT and its subsidiaries, improving their credit profile. However, the sale will increase BILT’s dependence on external pulp as it was able to procure surplus pulp from SFI (FY15: 50,194MT pulp).

Ind-Ra will resolve the RWE once the sale is complete and details are available to assess its impact on the credit profile of BILT and BGPPL.