Debt-Laden Indian Firm's Bond Waiver Plan Draws Investor Ire

(Bloomberg) -- A growing tussle between a debt-laden Indian company and some global money managers is highlighting broader concerns about leverage at the nation’s state-owned companies.

REC Ltd., an Indian lender to mostly rural electricity projects, last week began asking dollar bondholders to waive their rights to sell the debt back if the government ceases to own more than 50 percent of the company. Such an ownership change is set to happen after the government approved a plan to sell its stake in REC to Power Finance Corp. late last year.

Some investors see themselves getting caught between a rock and a hard place. In this telling, the fees they’d get for agreeing to the rights waiver aren’t enough. They fear that Power Finance, also a state-owned company with near-junk ratings, taking control could drag down REC’s bond prices. The case flags growing nervousness about debt at state firms, with the collapse of shadow lender Infrastructure Leasing & Financial Services Ltd. fresh on investors’ minds.

“The request to waive change-of-control conditions at current terms is patronizing,” said Dhiraj Bajaj, a Singapore-based money manager at Lombard Odier (Singapore) Ltd. His firm, which holds REC’s dollar bonds due 2027 and 2028, will not accept the waiver, he said.

REC didn’t immediately respond to an email seeking comment.

Click here for more concerns about REC’s request

The company is offering investors the equivalent of 5 cents and 3 cents on the dollar respectively to waive the rights for those two notes. REC is also seeking consent for a waiver on its 2020 and 2023 dollar bonds.

Following the acquisition, REC would become a subsidiary of Power Finance, whose notes trade at wider spreads. After the government sells a 52.6 percent stake in REC to Power Finance, its ownership in the former will fall below 50 percent.

Australia & New Zealand Banking Group Ltd. has warned investors that the fees being offered for REC’s bonds due 2027 and 2028 are “not generous enough” and the Power Finance acquisition means the securities are likely to be cut to junk.

REC’s dollar bonds due 2027 fell 0.3 cents to 95.5 cents on the dollar on Tuesday, set for the biggest decline in two weeks, according to Bloomberg-compiled prices. The securities have risen about 1.8 cents since Bloomberg reported on the company’s plan on Feb. 11, but are still below par, which is the price that investors have the right to sell at if the acquisition goes through.

The voting deadline for bondholders is March 8, and minority investors who don’t vote in favor run the risk of being over-ruled if sufficient holders approve the waiver.

While it considers the proposed consent fees on the 2020 and 2023 notes to be enough, Wells Fargo & Co. has recommended that holders of the 2027 and 2028 bonds vote against the plan as the fees are “insufficient to cover the potential spread widening” to Power Finance’s levels after the acquisition is completed.

--With assistance from Rajesh Kumar Singh.

To contact the reporter on this story: Denise Wee in Hong Kong at dwee10@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Beth Thomas

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