SP group faces tough investor conditions

The borrowing by the group comes as it seeks to meet its financial obligations, including repaying banks ₹4,400 crore, making a prepayment of around ₹3,250 crore in debt, and obtaining ₹3,000 crore working capital for its real estate and ports businesses, according to a 7 June note to high-net-worth investors.

The SP group, which owns 18.37% of Tata Sons, the holding company of the Tata group, has already pledged half of its stake owned by Sterling Investment Corp. Pvt. Ltd, an investment vehicle of the firm. Another investment entity of the group, Cyrus Investment Pvt. Ltd, which holds a 9.18% stake in Tata Sons, will also be provided as collateral.

“The facility has been structured such that two identified assets, namely Afcons Infrastructure Ltd and Gopalpur Ports Ltd, have been ring-fenced for the purpose of mandatory prepayment of the facility," the note reviewed by Mint said.

The group has offered to pay back the entire ₹13,500 crore within 30 months, promising an internal rate of return between 17% and 17.5%.

Potential lenders also have the option to own a majority stake in Afcons, the privately held firm of the group, as compulsorily convertible preference shares (CCPS) option that allows them to own a 72% stake. CCPS is a preferred option used by investors in unlisted startups as it offers them a fixed dividend during the tenure of the loan and can be later converted into equity in the firm.

The proposed loan has been designed with a high-security cover, as it will carry an implied cover of about 8.5 times based on Tata Sons’ shares and about 9.4 times based on the entire security package. “These are pretty onerous terms," said a Delhi-based alternative investment fund. “Monetizing Tata Sons stake in case of default won’t be easy, and questions remain on how Afcons is doing. Since there are not many investors who would be willing to fund the group’s requirement, a high interest rate on availing this money is being offered."

However, the two executives familiar with the development maintained that the fundraising plan is fraught with risks as the flagship business of the group is in construction and engineering, which has single-digit margins. “The interest rate goes up by 2% if the first tranche of ₹1,500 crore is not paid back before 31 December 2023 and by another 2% if another ₹7,000 crore is not paid back by 30 June 2024," said another executive who has worked with the SP group in the past. “There is always a risk in how a group will be able to make such payments." However, the investment pitch note addresses such concerns raised by potential investors. “The group’s ability to refinance the facility amount on maturity remains strong given facilities secured by TSPL (Tata Sons) shares have been regularly rolled over/refinanced basis the credit strength of TSPL shares in the past." An email sent to the spokesperson for the SP group on Monday went unanswered.

To be sure, the group has managed to monetize assets to reduce its debt by close to $1.4 billion ( ₹12,500 crore) in the past two years. The SP group has already sold a few of its businesses, including appliance maker Eureka Forbes and a majority stake in Sterling and Wilson Renewable Ltd, and paid back ₹12,500 crore last year to its creditors as part of a one-time resolution deal without a haircut.

The fundraising efforts, led by Shapoor Mistry, comes at a time he has had personal setbacks, first losing his father, Pallonji Mistry, in June last year and then his younger brother, Cyrus Mistry, who died in a car accident in September.

The group is also in the middle of a major restructuring by creating two holding companies to house its diverse businesses, ranging from real estate and construction to oil and gas, to be overseen by children of brothers Shapoor and Cyrus Mistry, Mint reported last month.