Home / Companies / People /  Sahara loan will open acquisition opportunity: Mirach’s Sharma

Mumbai: Mirach Capital Group Llc, which plans to extend a one-year loan of close to $2 billion to the Sahara group, will get the first right of refusal over the group’s three overseas hotel assets in the US and the UK. Given the Sahara group’s tight liquidity condition, Mirach expects this loan to convert into an opportunity to acquire these assets outright, Saransh Sharma, chief executive officer of Mirach Capital Group, said in an interview. Sharma denied that investors in Mirach Capital are associated with the Sahara group in any way.

Subrata Roy, founder and chairman of the Sahara group, has been locked up in New Delhi’s Tihar jail since March. Roy was jailed for failing to appear at a Supreme Court hearing in connection with a dispute with the capital market regulator over Sahara’s failure to refund about 20,000 crore that it owes investors. Roy needs to raise 10,000 crore to secure his release on bail, and the Sahara group has been trying to sell and mortgage properties, including the Plaza Hotel in New York and the Grosvenor House hotel in London, to raise the money.

Edited excerpts:

What is the nature of this investment?

The way it is working out is that Mr (Subrata) Roy is in a certain situation. I will refrain from making any comments in public about the litigations in this case. From an investment standpoint, he is in a position where he has got a few assets that are attractive. Most of his assets are in the form of land bank in Tier II and Tier III cities which are not that attractive partially because there is no cash flow in them and it is just land.

The problem he was facing was that the whole world was after his overseas properties and nobody wanted his Indian assets. So what happened was that he was asking for very unrealistic valuations against these offshore hotels. No real investor in the world will ever give you $3 billion or $2.5 billion because that’s the amount he needs. He needs $1.6 billion in bail and $900 million to pay Bank of China. Now everyone wants to give money against the international assets. People in India perhaps don’t even want to touch Mr Roy in this litigious time... I saw it as an opportunity to kind of structure a solution whereby you cherry-pick the best Indian assets like Sahara Star Hotel as well as the Aamby Valley project and kind of create a hospitality portfolio. On the internals, I am doing a CMBS (commercial mortgage-backed security) structure, so it’s some kind of syndication that I am doing. I have investors that I am working with. Each of these investors have a different focus. Some of them want to be on the senior loan side and some on the mezzanine loan side. The mezzanine loan is a hybrid between debt and equity, so there is an undisclosed equity kicker, so to speak, in the transaction as well. This has been put in there as part of a sweetener so to speak.

So the way this is, is you have a senior loan, a hybrid/mezzanine/junior loan. It’s a one-year loan and it is structured in a way where one year from now Mr Roy will not only have to clear off Sebi’s liability, but will have to pay me as well. So it’s almost a situation where he is going to come up with 24,000 crore to be paid to Sebi (Securities and Exchange Board of India), or whatever the shortfall is, before he can even pay me my loan monies back. The problem is he doesn’t have liquidity and he does not have any more assets. So what I foresee is that one year from now, he is going to have issues in his liquidity to pay me back the amount that is owed to Mirach. And that is going to open an opportunity for acquisition. And there is going to be no further refinancing. No one is going to refinance a 95% LTV (loan-to-value) loan. It’s pretty much written in stone thereafter that this thing is sold... He has been an unwilling seller. This has really hurt these properties. If you really look at the cash flow, the numbers have plummeted. In fact, in some cases, Plaza is running a loss where once upon a time it was a very healthy cash flow property and a property of that stature should not be running at a negative.

I am yet to conduct appraisals (for the Indian assets) to determine the fair value of these assets and I do believe there is a little bit of debt on the Sahara Star, but these numbers still need to be verified and validated and that is a part and parcel of the process in the next 35-40 days. But should those numbers check out, you are looking at me acquiring these hotels. So I will be buying these hotels at a significant discount just to protect my upside.

What is the immediate debt component in this deal?

The total loan package is $882 million to Bank of China, $650 million to Sebi-Sahara fund and $450 million which is divided into two of $180 million to Sahara Star and $270 million to the resorts silo of the Aamby Valley project. There are a total of five investors that this is being piece-mealed with. So it is a fully syndicated play.

Who are the five investors in Mirach Capital?

I would refrain from disclosing the identities of the investors at this juncture. However, perhaps before 20 February, we would be in a better position to disclose their identities. By that time, we would have executed the deal.

Are these India investors?

No, they are all international investors. There is a British group and rest are from the US.

Mirach Capital partly manages an Indian family trust as well. So then I assume that money is part of this?

Yes, it will be and that will perhaps be the capital that takes exposure against the Indian assets. I would prefer to refrain from disclosing the identity of the Indian family trust as of now.

Is it the Sharma Family Trust?

No comments. This is a very sensitive and politically charged situation, so I would have to wait for the right time just to feel secure in disclosing any identities.

What is the mandate of Mirach Capital? When was it formed?

It is a brand new entity formed a few weeks ago. It is a special purpose vehicle that was formed strictly for this transaction. It is a Delaware limited liability company (Llc). I created a couple other Llcs around the same time, one in Nevada and one in Miami because one of the investors is a Vegas-based group and the other is in Miami. There’s another Mirach which has been incorporated in the UK. This was done to take in the capital from these investors. There is some legal structuring happening internally which will properly reflect the membership interest of various investors.

This is Mirach’s first investment?

This is Mirach’s first transaction and Mirach has been formed strictly for this transaction only.

Are any or all of the investors associated with the Sahara group in any way?

All of them have approached the Sahara group independently at different times over the last year. They all have prior dealings. Sahara had received approximately 28 offers for its assets. For whatever reason, Sahara did not take the offers. I think the litigation pressure has been so great on Sahara that they have been unable to focus internally on perhaps doing an in-built syndication because they had all the raw materials to their benefit.

But none of them are associated with the Sahara group?

No. None of them have relationships at the moment. None of them have prior business dealings. They are all very separate and very distinct. They are all billionaire families and certainly noteworthy families of their own accord. This will be publicly known when the time comes because they will be declared as lien holders of the properties.

Does the Sharma Family Trust have dealings with the Sahara group? Satish Kumar Sharma is the founder of the trust and his name also appears on the director’s list of a number of Sahara group companies.

That is not true. Sharma Family Trust has no dealings with Sahara. The first dealings ever done with Sahara were four or five months ago when I personally reached out to members of the Sahara group. Prior to that, there was zero relationship. They have very little business in India—just a home here and a home there. But most of the Sharma Family Trust assets have been in technology.

The trust’s website says it has property projects in Gurgaon?

Yes. I wouldn’t call them projects. There is ownership and there is land that is owned by my father, Dr Satish Kumar Sharma, but certainly not anything noteworthy. Our exposure to India has been very minimal. Most of the exposure or wealth creation has been through my business activities over the last five-six years in the fields of Facebook, LinkedIn and Twitter. There has been no Sahara exposure prior to this.

But Satish Kumar Sharma shows up as a director on a number of Sahara companies?

That may be some other Satish Kumar Sharma. I’m actually surprised, but it is a common name, but that’s not my dad. My dad is Dr Satish Kumar Sharma. But I would like to find out who this other Satish Kumar Sharma is.

But the Sharma Family Trust then is associated with Mirach Capital?

No comment.

You represent both the Sharma Family Trust and Mirach Capital?

I do. Correct. But I would refrain, for the time being, from making it a Sharma Family Trust story. It’s more a Mirach Capital story because it’s all about the syndication.

Why didn’t any of the other large investment bankers suggest this structured solution?

They did. I just think that they didn’t know how to approach Mr Roy.

How did you approach Mr Roy?

Mr Roy is an interesting guy. When you look at his history, I think the writing is on the wall on what he likes and what he doesn’t. I have to be careful when I say these things—but I can be sweet when I talk. Let’s just leave it at that. I was a Mr Nice Guy and I approached him in a very soft sense. I’ve always learnt, as a sales guy, that you get more with honey than you get with vinegar. It’s an approach I have used quite frequently. If you approach someone whose back is against the wall in an adversarial manner or a predatorial manner, you’ll get a push back. It’s better to reach out with a nicer, softer helping hand which brings the person out.

But you didn’t know him prior to this?

No. I had no idea. I did know of the name Sahara because of cricket. But I had no dealings with them. I actually reached out to their CFO (chief financial officer) on LinkedIn. It was a cold call. I said we want to put in an offer and can I have your number. So that’s how it happened. There is obviously a paper trail to confirm that. Once again, the fact that my father and some board directors share the same name is purely an irony. There is zero relationship with Satish Kumar Sharma who sits on their board.

What is the effective interest rate on the debt?

The blended interest rate comes to 9.7% or 9.75%.

Isn’t that low for a high-risk company like Sahara? That’s close to the base rate in India?

I know. It’s 11.5% on the junior (loan). It’s 8% on the senior (loan). But the junior (loan) has no cash flow to support that interest rate, so it’s just a figurative number. Then there is an equity component. And the equity component, this is the ROFR (right of first refusal) element that I was talking about, where we have the right to acquire the asset at discount from the highest cash offer in the marketplace. So let me give you an example: If $2 billion is an all-cash offer made to Sahara one year down the road, hypothetically speaking. We can buy it at say a 10% discount, as a hypothetical number. The group that is looking to buy it for $2 billion, we can then sell it to them and make a good $100 million spread. So whatever that discount is an equity kicker, and I will refrain from disclosing it at the moment, but it is an attractive amount and it offsets any shortfall in interest payments that they are unable to pay. It makes for an attractive transaction at the end of the line.

But if their back is to the wall, as you said, you could have sought a higher interest rate? No one in India will lend to them at anything close to that. Couldn’t you have locked in higher rates?

So we have 11.5% locked in on the junior piece. On the senior, its locked in at 8%. The reason it’s locked in at 8% is because it’s doing a full cash sweep. All the cash that is available from these properties is being taken off the table in favour of the senior loan.

And let’s say if we have that 10% discount built in, then 10% + 11.5% is what we are really getting. That’s one way to look at it. It’s really a question of what do you call it. You can call it interest rate or you call it an equity kicker, it doesn’t matter.

To put it in perspective, if you wanted to call it interest rate, it would be north of 20%.

You need Reserve Bank of India (RBI) approval because this will qualify as an external commercial borrowing?

I am not entirely familiar with that. Everything in this is very Sebi-compliant because if I am to look forward to doing business in India, which makes sense after this transaction, I don’t want to be on the backfoot.

You’re not registered with Sebi yet?

Not yet. And I am looking at an NBFC (non-banking financial company)—to start one or acquire one—depending on the timing.

But you don’t know what the RBI approval is needed for?

This is my understanding, but I don’t have all the facts. From what I have listened into—Aamby Valley Ltd, which is an India-based company, raised the money from the market. Then...they loaned that money to Aamby Valley Mauritius Ltd... Then from Aamby Valley Mauritius Ltd, the money went out in the form of bonds to these US companies that own the assets. So now what we are doing is that we are placing liens against the US and the UK companies directly cause that’s how an investment of this nature would work. Then that capital will flow from there and the loans repaid to Aamby Valley Mauritius. And then from Aamby Valley Mauritius, it’s a loan repayment to Aamby Valley Ltd in India. So the argument is that when the money went out of India, it had taken all the necessary approvals at that time to be compliant. Therefore, at the time of their repayment, no real approval is needed. Nevertheless they are still seeking approval because the Supreme Court has still asked for it and they want to be fully compliant. And I didn’t want my money or my investors’ money to get stuck in some kind of a furball.

They are apprehensions about the source of these funds and in particular whether this is money from the Sahara group itself. Your response to that...

The funds being loaned to Sahara are of good, clean and international origin that can be proven by tax returns and other public filings. In a transaction this complex, everyone including banks do very stringent KYC (know your customer) and AML (anti-money laundering) checks. That means, source and origination of funds have to be disclosed.

Once those disclosures are made publicly, everyone will realize that there is no attachment of Sahara in any way, shape or form to the funds.

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