Canada's Fairfax Financial Holdings is planning to exit its nearly 11% stake in IIFL Finance as it looks to raise funds for its proposed acquisition of a controlling stake in IDBI Bank.
Reuters citing two people familiar with the discussions reported that Fairfax is looking to complete the sale soon. The proposed stake sale is aimed at unlocking capital for Fairfax's purchase of a 60% stake in IDBI Bank from the Indian government and Life Insurance Corporation of India (LIC), the country's largest insurer, according to the report.
Fairfax first invested in IIFL Finance in 2015, acquiring a stake of nearly 22% in the company. Its holding has since been diluted to around 11%.
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The potential exit comes days after IIFL Finance announced plans to expand its capital base through an investment by US-based private equity firm Blackstone. Under the arrangement, Blackstone will acquire a 16% equity stake in IIFL Finance through convertible shares and warrants.
Fairfax is looking to fund the IDBI Bank acquisition through a combination of holding company cash, dividends from its insurance businesses, potential asset sales and contributions from its interests in Go Digit Life Insurance, Go Digit General Insurance and IIFL Capital.
The company's financial leverage stood at around 34% at the end of June. However, the ratio declined to 27% after excluding non-recourse debt at its non-insurance businesses.
Moody's does not expect the acquisition to result in a significant increase in Fairfax's leverage, given the funding arrangements planned by the company.
Fairfax also follows a policy of maintaining at least $1 billion in cash and liquid investments at its holding company. Moody's expects the company to retain this minimum liquidity buffer even after completing the IDBI Bank transaction.
Last week, the government approved Toronto-based Fairfax as the strategic buyer for a 60.72% stake in IDBI Bank, valued at Rs 52,878 crore, or approximately $5.6 billion.
The transaction is expected to be completed within six to nine months, subject to regulatory approvals and other customary conditions.
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The proposed acquisition would give Fairfax control of a diversified Indian financial services business spanning banking, insurance and wealth management. Moody's views the expansion as credit-positive, pointing to India's growth prospects and the potential for more diversified earnings.
IDBI Bank's turnaround is also a key factor behind the proposed transaction. Following a period of financial distress, the bank underwent a management overhaul in 2018. Recapitalisation by the government and LIC helped restore its financial position, and the lender has remained profitable since 2021.
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