SP group firm’s bond offers 16-17% yield but here’s the risk
The news of Goswami Infratech Pvt. Ltd— a Shapoorji Pallonji (SP) Group company— raising debt last month raised quite a few eyebrows.
The news of Goswami Infratech Pvt. Ltd— a Shapoorji Pallonji (SP) Group company— raising debt last month raised quite a few eyebrows. That was because the company tapped the bond market to raise a massive ₹14,300 crore at a whopping 18.75% interest.
The issue was rated BBB- by CARE, barely hanging on to the ‘investment grade’ rating by a thread. The non-convertible debentures (NCD) have an approximately 3-year tenor, maturing in April 2026. Institutions, largely foreign funds and banks, bought the issue in the primary market. However, a few participants have been offloading some of it in the secondary market to high net worth individuals.
Yields have since dropped to about 16-17% there. Yet, they continue to be at extremely high levels for a couple of reasons. For one, these are zero coupon bonds. So, investors will not have periodic coupon payments that yield steady cash flows. Two, the repayment seems to hinge on the SP Group raising money by selling some assets.
“The new NCD issuance is proposed to be backed by monetization events comprising of port assets as well as Afcons Infrastructure Ltd wherein Goswami Infratech holds stake in the form of compulsorily convertible preference shares (CCPS). The covenants around the monetization events are likely to reduce the refinancing risk at the end of tenor and hence would be important from credit perspective,” said a note from CARE Ratings on 20 June.
For bond holders though, there is back-up in the form of a letter of comfort from another SP Group company, which, in turn, holds shares in Tata Sons, the principal holding company of the Tata Group. “The rating derives strength from the experienced and resourceful promoter group, support in the form of Credit Support Undertaking (CSU) from Cyrus Investments Private Ltd (CIPL) along with the pledge of its portfolio holding. CIPL, along with Sterling investment Pvt. Ltd. (promoter holding companies) have 9.185% stake each in Tata Sons Pvt. Ltd, which has provided financial flexibility for the group holding companies to raise funds,” the CARE Ratings note added.
Risks for bondholders
Suresh Darak, co-founder at Bondbazaar, estimates the worth of the Tata Sons shares held by CIPL to be about 5-7 times the debt issued by Goswami Infratech. However, the shares are unlisted and difficult to value. Tata Sons is a private limited company.
In the event of a default, the Tata Sons board can prevent the bond holders of Goswami Infratech from becoming its shareholders. Moreover, Tata Sons also has a ‘first right of refusal’ on its shares before they can be offloaded by the SP Group to a third party.
Investors know that, in the event of a default, there would be a lengthy legal process to recover their money. “You should see this issue as equivalent to equity in risk, rather than debt,” said a senior fixed income expert with a bond platform who declined to be named.
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First Published:9 Aug 2023, 10:29 PM IST
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