For Limited Time Only. (Photographer: Hannelore Foerster/Bloomberg)

Essel Group Agreement With Lenders May Only Buy Them A Few More Months

Corporate debt investors just can’t seem to catch a break lately. The default by once AAA-rated Infrastructure Leasing and Financial Services. Fears over liquidity position of non-bank lenders. Defaults in ring-fenced operational infrastructure projects of IL&FS. And now the deterioration in the financial position of another large conglomerate—the Subhash Chandra-led Essel Group.

Over the weekend, the Essel Group said that it had arrived at an “understanding” with its lenders, following a sharp fall in the stock price of the group’s listed entities, including Zee Entertainment Ltd and Dish TV Ltd.

The fall in these stocks had meant that covenants included in some of the debt securities subscribed to by mutual funds and non-banking finance companies had been breached. The breach of these covenants allowed lenders to invoke ‘an event of default’ but they chose not to.

“There will not be any event of default declared due to the steep fall in price,” said the statement released by the group.

What Is The Agreement?

Mutual funds have a total exposure of around Rs 7,500 crore to non-convertible debentures issued across nearly 13 entities of the Essel Group, according to data available with rating agencies. Exposure of non-banking financial companies to these securities is about Rs 4,000 crore.

According to executives at two mutual funds, who hold these securities, the agreement between lenders and the group is a formal one. However, the paper work and approval needed for such an agreement is being worked upon now, said one of the two people cited earlier.

Close to 96-97 percent of lenders have agreed to revised terms, said Puneet Goenka, managing director of Zee Entertainment Enterprises Ltd., on an investor call on Monday.

The agreement essentially allows the company to temporarily breach the covenant which specifies the equity cover that the promoters need to maintain. This cover ranges from 1.5 times to 2 times the debt. With the fall in the stock price, the equity cover had fallen below the required amount.

There was heavy selling in stocks of group companies due to a margin call, which led to the covenants being breached, said one of the executives cited earlier. Lenders were then left with two choices—sell the equity they held if the promoters remained in breach or agree on a temporary standstill. By choosing the latter, lenders are hoping that there is eventually a chance to recover more money for investors, said the first person cited earlier. Selling the equity now would have meant ‘crystalising’ the losses, this person said.

The covenants give lenders the option to trigger an ‘event of default’ but they can choose not to, said a senior official with the debt capital market division of a bank. This person, however, added that the agreement may not completely insulate investors and lenders if rating agencies downgrade securities of these entities.

Rating agencies may not downgrade the securities to ‘D’ on breach of covenants, said the first person cited earlier. However, if there is an actual default at the time of maturity then the concerned security would be downgraded and funds will have to take a hit, said this person.

Maturities Coming Up In 2019

While lenders may have bought themselves some temporary reprieve, the clock is ticking. A number of the entities to which mutual funds and NBFCs have exposure have debt maturing in 2019.

Data from Bloomberg shows that eight of these entities have debt maturing this year. The largest maturities coming up include:

  • Cyquator Media Services has Rs 450 crore in debt maturing between March and April.
  • Edison Infrapower has Rs 375 crore maturing between March and June 2019.
  • Essel Corporate Resources has Rs 850 crore maturing between July and August.
  • Sprit Infrapower, too, has Rs 1075 crore coming due this year between March and July.

Funds are just buying some time to see if the promoter group can bring in a strategic investor, said the second person cited earlier. With maturities coming up this year, funds will have to watch the situation closely.

The second fund manager acknowledged that if there is an actual default on maturity, rating agencies would mark the securities down to D. We're in conversation with rating agencies as well, said this person.

The best case scenario for lenders would be that promoters manage to bring in a strategic investor as promised. A combination of asset sales and stake sale in Zee Entertainment will help promoters cut debt, Goenka told investors. “The company will disclose names of potential strategic partners at the right time,” he said. If the deleveraging plans fail to materialise, debt fund investors and NBFCs may have to brace for another hit.