Rising Risk For Equity-Backed Bonds Of Anil Ambani Group?
Troubles for the Reliance Anil Dhirubhai Ambani Group have spread beyond the conglomerate’s beleaguered telecom firm, with rating agencies downgrading two financial services firms run by the group and creditors starting to sell shares of other group companies pledged with them.
Last weekend, Care Ratings assigned a ‘D’ or default rating to Reliance Home Finance Ltd. and Reliance Commercial Finance Ltd. citing delays in repayment of bank debt. The group acknowledged that there had been “minor delays”. In explaining the downgrades, Care Ratings highlighted that the group’s asset monetisation plans are taking longer than anticipated.
These delays have increased the inherent risk in equity-backed bonds issued by companies of the Anil Ambani group. According to data compiled by BloombergQuint, the group has borrowed Rs 2,812 crore using such instruments.
In February, the group said that it had reached an informal stand-still agreement with mutual funds and non-bank lenders who hold these bonds. Lenders, according to the company’s comments, agreed not to sell the shares backing these bonds despite any breach of covenant such as a fall in the required equity-cover.
Since the agreement, shares of the most of group companies whose equity backed these debt instruments have only fallen, raising the underlying risk for investors. These companies include Reliance Capital Ltd., Reliance Communications Ltd., Reliance Power Ltd., Reliance Home Finance Ltd. and Reliance Infrastructure Ltd.
Despite the standstill agreement, at least some creditors have been selling pledged shares of Reliance Capital, Reliance Power and Reliance Infrastructure in March and April, shows data from stock exchanges.
Queries were emailed to a spokesperson of the group on Tuesday. The story will be updated with any response.
Reliance Big Entertainment Pvt. Ltd.
Among the entities that has raised funds using equity-backed bonds is Reliance Big Entertainment.
The media and digital content arm of the group has raised around Rs 1,075 crore through term loans and non-convertible debentures. Funds were raised via these debt instruments by pledging promoter shares in Reliance Capital, Reliance Infrastructure and Reliance Communications.
The security cover for the three term loans and one NCD stands at 2-times, according to rating documents.
As per Brickwork Rating Pvt. Ltd.’s last published rating rationale, these instruments are still ‘investment grade’. However, the company’s losses have risen and it’s net worth has declined.
Reliance Big Pvt. Ltd.
The company, engaged in media and entertainment services, has outstanding non convertible debentures worth Rs 575 crore which mature on Jan. 14, 2021.
The NCDs were raised by pledging shares in Reliance Capital, Reliance Home Finance, Reliance Infrastructure and Reliance Power. The security cover is pegged at 2-times.
Although the company’s operating income has grown, its net loss rose to Rs 33 crore in financial year 2017-18 from Rs 21.74 crore in FY17. Further, the networth of the entity has fallen to Rs 800.55 crore in FY18 from Rs 1108.8 crore in FY17.
Reliance Infrastructure Consulting and Engineers Pvt. Ltd.
Similar to other group companies, Reliance Infrastructure Consulting and Engineers posted a fall in its net profit at the end of FY18 as compared to the previous financial year.
The company raised around Rs 650 crore in December 2017, through non convertible debentures set to mature on Jan. 15, 2021. This instrument entailed a two-times security cover comprised of pledged promoter shares in Reliance Capital, Reliance Home Finance, Reliance Infrastructure and Reliance Power.
Reliance Endeavour Management Pvt. Ltd.
Engaged in the business of generation of electricity through windmills, the firm only has one windmill power generation plant with a capacity of 750 Kilo-Watt. It has no other significant operations.
The company had a negative networth of Rs 21.75 crore at the end of FY17, which further deteriorated to Rs 78.36 crore by FY18. As operating income fell, the firm’s net loss widened to Rs 56.6 crore in FY18 as compared to Rs 20.5 crore in FY17.
Rising Risk Due To Share Price Fall
As BloombergQuint earlier reported, about Rs 40,000 crore in equity-backed bonds are outstanding. Unlike traditional fixed income instruments, these bonds are susceptible to equity risk borne by the underlying companies.
For instance, with the share prices of Reliance Capital, Reliance Infrastructure and Reliance Power falling, covenants requiring a certain share cover may get triggered. This could allow the mutual funds to sell the remaining securities in the open market to recover their dues. With a standstill agreement in place till September this year, the group is trying to keep that risk at bay.
The underlying risk, however, remains until the group can deleverage and repay some of its outstanding dues.