If you have bitten a bullet, you better chew it, too. Fund houses that have financed Yes Bank co-founder Rana Kapoor are finding it hard to do that.
Enticed by returns during good times, fund managers had entered into a layered deal that uses Kapoor’s Yes Bank shares as collateral for a loan. Interestingly, the loan was unsecured and investors couldn’t force Kapoor to sell his shares to make good a repayment.
But what can you expect if capricious equity is collateral for a debt instrument that demands disciplined repayment?
In the case of Morgan Credit Pvt. Ltd (MCPL), the investors forced Kapoor to secure the loan through pledging of shares last week.
Yes Bank shares fell over 15% on Thursday, partly because Kapoor had to sell his pledged shares of Yes Bank held through MCPL to prepay borrowings against the shares. “With the sole intention of reducing debt of the promoter holding firm—MCPL, owned by my three daughters, it was decided to bring down our family ownership in YES Bank to 7.4%," Kapoor said in a release.
The stock has dropped a massive 75% in the last five months and has spooked everyone, including Kapoor.
Care Ratings downgraded bonds of MCPL to BBB- from A- on Tuesday, even though fund houses had forced Kapoor to pledge shares. Of course, this meant that the collateral value had fallen.
In February, when Care Ratings had given A- to the bonds, the collateral to loan ratio was 2.0. Since then, Yes Bank shares have dropped 63% resulting in the downgrade.
Besides MCPL, Kapoor holds Yes Bank shares through Yes Capital.
In the case of Yes Capital, however, the value of shares has to be 2.25 times that of the loan because there is no pledge. As of August, the outstanding bonds of Yes Capital rated by Care Ratings was ₹207 crore, against a Yes Bank stake of 2.97%. The fall in the bank’s shares has brought down the cover to 2.37 times from as high as 4 times three months ago.
While Kapoor can’t be forced to sell, investors can ask him to make good the shortfall in collateral value.
J.N. Gupta, a former executive of the Securities Exchange Board of India, said the best recourse for investors is to invoke pledges or take a hit. “Mutual funds did not anticipate these things when investments were made in innovative structures. Now, they will have to face the reality," he added.
Reliance Nippon Asset Management Co. was lucky to get prepaid part of the bonds it owns.
Perhaps Kapoor’s turnaround to a willing seller of Yes Bank shares, from someone who considered them diamonds forever, is driven partly because of the likelihood of pledges being invoked.