Indian conglomerate Shapoorji Pallonji Group's latest huge private credit deal requires the Reserve Bank of India to provide a regulatory waiver for one of its units within months to avoid triggering a default.
SP Group subsidiary Porteast Investment's Rs286bn (US$3.4bn) of 19.75% zero-coupon unlisted and unrated three-year bonds are secured by the pledge of a 9.185% stake in conglomerate Tata Sons Private, as well as 100% stakes in SP Group's real estate unit and oil and gas business, according to an indicative term-sheet seen by IFR.
Institutional investors agreed the terms on May 15, and the funds were expected to be transferred by the end of May.
However, the deal requires share pledger Sterling Investment Corp, a non-banking financial company, to obtain approval from the RBI for an extension to meet capital adequacy requirements or else the group will have to set aside Rs60bn to be infused as capital.
If the issuer is unable to meet this obligation within four months, bondholders can call an event of default, as long as holders of 50.1% of the paper support the move, the term-sheet states.
The central bank requires systemically important mid-layer non-bank lenders to maintain a capital adequacy ratio of 15% of their risk-weighted assets.
Shapoorji Pallonji Group did not immediately reply to an email asking when the RBI's approval was expected.
A source close to the deal said he was confident RBI approval would come through as Cyrus Investments, another group unit, received an extension from the RBI to meet capital requirements when the group did a similar deal two years ago.
Some of the sources aware of the transaction said that SP Group went ahead with the deal before confirming the RBI extension because it has needed cash ever since plans to obtain a loan from Power Finance Corporation fell through in November last year.
SP Group needs to refinance Rs240bn of Sterling Investment debt, which was originally due in May last year before the maturity was extended. The remaining Rs35bn from the bond issue will be used as liquidity for the group's other requirements.
Payment timelines
The current deal includes interim payments from the monetisation of assets in the next two years, similar to a previous private credit transaction for another group company in June 2023.
Property company Goswami Infratech raised Rs143bn from short three-year high-yield zero-coupon bonds backed by Cyrus Investments. The deal also had covenants linked to the listing of construction and engineering company Afcons Infrastructure, which was completed in November, and the monetisation of port assets. The interest rate on the Goswami bonds stepped up by 400bp at one point when it breached the covenants.
The terms of the new deal state that the interest rate will step up by 100bp if the Goswami bonds are not refinanced by January 1 2026. If the Goswami bonds are refinanced by a higher-yielding facility, then the yield on the Porteast trade will also step up.
There is also a deadline for the group to repay Rs130bn (including accrued premium and principal) to holders of the Porteast bond issue from the sale of real estate, oil and gas assets, upsized debt redemptions by Cyrus Investment or any other sources within two years. It also needs to complete the IPO of its Shapoorji Pallonji Real Estate unit within the same period.
Any delay in meeting the monetisation timelines may trigger an event of default.
Sources aware of the deal said that in case the group is not able to meet the scheduled timeline, it could privately negotiate extensions from bondholders – potentially by sweetening the terms. The Goswami bond ended up in the hands of some high-net-worth and retail investors after the initial holders sold in the secondary market, but the minimum investment for the new deal is Rs100m, compared with Rs100,000 for the Goswami issue, which will keep it out of the hands of individual investors and make any negotiations easier.
If there is a covenant breach and bondholders do not agree to an extension of payment deadlines, SP Group's controlling shareholders could sell the unlisted Tata Sons shares, which are valued at around US$18.6bn, as a last resort.
"Liquidity is the only risk. If the issuer is not able to refinance, holders of the debt securities will get the shares. Those shares are not worthless, but they will not be easily transferable," said Hemant Dharnidharka, managing director at investment advisory firm Dharni Capital Services.
When Tata Sons was incorporated it had restrictive clauses with respect to transfers of its equity shares, but following a ruling from India's Supreme Court in 2021 it is now required to offer a buyback of shares at fair value to any shareholder who wants to exit.
The loan-to-value ratio for the Porteast transaction is around 14.7% as, in addition to the Tata Sons shares, the real estate and oil and gas business are valued at US$3.2bn and US$275m respectively.
FPI rules relaxed
Market participants said that the deal may benefit from a RBI's relaxation of rules on foreign investment in corporate bonds on May 8.
Under the revised rules, foreign portfolio investors can invest in any amount of short-term corporate bonds and take a larger exposure in fewer issues, as long as it is within the overall FPI limit set by the market regulator.
BlackRock, Pimco, Davidson Kempner Capital Management, Farallon Capital Management, Ares Management and Deutsche Bank are heard to be large investors in this trade, among others.
Earlier, FPIs were not allowed to have more than 30% of their corporate bond investments in debt securities with less than one-year residual maturity and had to adhere to a concentration limit of 10% to 15% for investments in long-term corporate bonds.
Market participants said these changes were crucial, as some FPIs who had invested in the Goswami bonds were forced to sell due to regulatory limits being breached.