SP group agency’s bond presents 16-17% yield however right here’s the danger

The information of Goswami Infratech Pvt. Ltd— a Shapoorji Pallonji (SP) Group firm— elevating debt final month raised fairly a number of eyebrows. That was as a result of the corporate tapped the bond market to lift a large ₹14,300 crore at a whopping 18.75% curiosity.

The situation was rated BBB- by CARE, barely hanging on to the ‘investment grade’ ranking by a thread. The non-convertible debentures (NCD) have an roughly 3-year tenor, maturing in April 2026. Institutions, largely international funds and banks, purchased the problem within the major market. However, a number of individuals have been offloading a few of it within the secondary market to excessive web price people.

Yields have since dropped to about 16-17% there. Yet, they proceed to be at extraordinarily excessive ranges for a few causes. For one, these are zero coupon bonds. So, traders is not going to have periodic coupon funds that yield regular money flows. Two, the compensation appears to hinge on the SP Group elevating cash by promoting some property.

“The new NCD issuance is proposed to be backed by monetization occasions comprising of port property in addition to Afcons Infrastructure Ltd whereby Goswami Infratech holds stake within the type of compulsorily convertible choice shares (CCPS). The covenants across the monetization occasions are prone to cut back the refinancing threat on the finish of tenor and therefore could be vital from credit score perspective,” mentioned a be aware from CARE Ratings on 20 June.

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For bond holders although, there may be back-up within the type of a letter of consolation from one other SP Group firm, which, in flip, holds shares in Tata Sons, the principal holding firm of the Tata Group. “The ranking derives energy from the skilled and resourceful promoter group, help within the type of Credit Support Undertaking (CSU) from Cyrus Investments Private Ltd (CIPL) together with the pledge of its portfolio holding. CIPL, together with Sterling funding Pvt. Ltd. (promoter holding firms) have 9.185% stake every in Tata Sons Pvt. Ltd, which has offered monetary flexibility for the group holding firms to lift 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,” mentioned a senior mounted revenue knowledgeable with a bond platform who declined to be named.

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Updated: 10 Aug 2023, 12:47 AM IST