SREI Group Gets 6 Months Moratorium Order from NCLT, Leaving Retail NCD Investors in Lurch
In an alarming development for retail investors of Kolkata-based non-banking finance company (NBFC), SREI group has apparently frozen interest payments and redemptions of its non-convertible debentures (NCD) from 1 January 2021 to 30 June 2021. This is the result of an order from the National Company Law Tribunal (NCLT). However, the freeze on interest payment and redemption of NCDs has hit hard the retail bond investors, many of whom are senior citizens, who rely on the interest payments for their day-to-day living. The action by SREI has also delivered a fresh blow to the already spooked bond markets.
In a statement, SREI group said, “For the first time in our history, and due to COVID-19 and key regulatory compliances, we are compelled to defer payments to creditors including NCDs. All payments will be rescheduled through the proposed schemes. Please have patience as we value your long-term confidence.”
SREI group, with its two NBFCs, SREI Infrastructure Finance Ltd (SIFL) and SREI Equipment Finance Ltd (SEFL), has a large footprint in infrastructure and finance and has been in the news over the past couple of months for the wrong reasons. The group approached the NCLT in December-end without taking prior approval of the lenders.
Last week, Catalyst Trusteeship (debenture trustee for the bonds) sent emails to all the bond-holders with a copy of the NCLT order. The attached document says, “an application filed by SREI Equipment Finance under Section 230 of the Companies Act 2013 before the NCLT, Kolkata Bench being CA(CAA) No. 1492 / KB / 2020, proposing a scheme of arrangement with: all the secured or unsecured NCD holders of the company; all the foreign lenders from whom the Company had availed secured or unsecured external commercial borrowings; and all the perpetual debenture holders of the Company.”
The order further says, “…we direct that in the meantime till further orders, the creditors (including representative security or debenture trustees) of the applicant company covered under the scheme shall maintain status quo with respect to their respective contractual terms dues claims and rights and the creditors (including security or debenture trustees).”
“All governmental or regulatory authorities shall be stopped from taking any coercive steps, including reporting in any form and/or changing the account status of the Company from being a standard asset, which will prejudicially affect the Company and/or sanctioning and/or implementation of the Scheme.
“It is further directed that the credit rating agencies shall not consider any such non-payment to be a default under the respective debt documents and shall maintain the rating(s) of SEFL at least that of investment grade,” the NCLT order says.
There is a similar order copy attached for SREI Infrastructure Finance.
According to SREI Equipment Finance, this scheme will create an opportunity for the company and its creditors covered under the Scheme to efficiently deal with asset liability mismatch of SEFL caused due to the economic downturn on account of the pandemic created by COVID-19 and the Reserve Bank of India (RBI)’s August circulars on mutually agreed terms. It says, “This Scheme will enable SEFL to, inter alia, focus on operational flexibility and respond to the present environmental challenges faced due to the severe Novel Coronavirus (COVID-19) pandemic spreading across the globe.”
The company added that “the proposed scheme shall ensure an orderly payment structure to the creditors in consonance with the cash flows of SEFL and thereby achieving the synergy with the cash flow management being implemented by the term loan and working capital lending banks of SEFL.”
According to retail bond investors, the emails sent by Catalyst are vague and unclear. There is no detailed information in the public domain about what these 'proposed schemes' referred to in the document denote. The NCD investors, many of whom were unlucky enough to participate in multiple tranches of the NCDs, are hoping for an expedited resolution with no capital loss.
They are worried about the developments and one jittery investor even asked “Is the company defaulting and dumping the retail NCD investors to fend for themselves?”
There appears to be an active skirmish between lenders and it remains to be seen if retail bond investors’ interests are safeguarded.
To help retail investors navigate the minefield of debt investing, regulators place considerable faith in the opinions of rating agencies which have often proved clueless.
SREI Infrastructure Finance last raised funds through a public debt issue in May 2019, when it was rated AA+. The rating has since been downgraded to BB+ with a negative outlook and investors who had invested in the debt issue are currently facing the implications of the downgrade, which are: A) increase in spreads; and B) lack of liquidity.
Brickwork ratings has downgraded SREI Infrastructure Finance to BB+ with negative outlook from A- (negative) after considering the decreasing asset base, weak asset quality due to weak credit profile of the portfolio, significant decrease in profitability in second quarter (Q2) of FY20-21, higher interest cost and provisions, declining capital adequacy ratio, continued high gearing against an expectation of significant reduction in gearing through capital infusion and liquidity stress faced by the NBFC sector affecting the borrowing capacity of the company.
According to CARE Ratings, SREI Infrastructure Finance‘s long- and short-term bank facilities stood at Rs11,117.71 crore and at Rs16,912.21 crore for SEFL.
As of Q2FY20-21, the amount of overdue moratorium utilised stood at Rs12,282.8 crore. Revenue from operations decreased by 19% and profitability declined by 15% year-on-year (y-o-y).
SREI has been facing significant stress on their debt, especially in the past one year in yet another indication that business conditions of many borrowers have deteriorated despite the fiscal and monetary pump-priming due to COVID.
SREI Story So Far:
Earlier in November last year, the RBI had appointed an auditor to undertake special audits of Srei
Infrastructure Finance and its subsidiary Srei Equipment Finance. The special audit was directed by RBI to examine Srei’s possible links with the beleaguered IL&FS- India’s largest shadow bank which collapsed in mid-2018, shrinking the bond market and unsettling regulators. The audit is also expected to track the end-use of the money lent by SREI firms against ‘letter of awareness’ issued by the IL&FS group. It seems RBI (as regulator) might have woken up a tad too late.
In November, it was reported that a few lenders to the Srei group were expected to approach the National Company Law Appellate Tribunal (NCLAT) over Srei’s move to reconsolidate its assets in a separate group company in potential breach of loan covenants.
At a meeting of bank chiefs on 19 December 2020, bankers formed a committee comprising general managers from five top lenders to Srei in order to streamline decision-making and plan the future course of action related to both the Srei NBFCs. Lenders were supposed to finalise the scope of the forensic audit and were in the process of picking an auditor.
In mid-December, the Hyderabad bench of NCLT dismissed the petition of Srei Infrastructure Finance seeking status as ‘creditor’ of Hyderabad headquartered ailing media house Deccan Chronicle Holdings, clearing the decks for insolvency resolution process. Srei Infrastructure Finance Ltd had earlier moved the tribunal against the decision of the interim resolution professional (IRP) (KK Rao) terming it a ‘related party’ after it converted debt into equity to emerge as the largest shareholder in Deccan Chronicle Holdings.
Hemant Kanoria, chairman of Srei Infrastructure Finance Ltd, in an interview with Mint
, admitted that there is a cash-flow mismatch but added that “the underlying assets against our loans and receivables are substantial to repay our creditors in an orderly fashion. We have moved NCLT to structure an orderly repayment of our loans. We have so many creditors, and NCLT gives us a platform to address all creditors in one go”. He has however said that he is “open to any other suggestions from bankers.” He has also sought to play down all the allegations saying that RBI’s special audit will soon get over and it will quell all unnecessary speculations.
In its research note released yesterday, Emkay stated
“The stress of small and medium enterprises can be largely contained via the emergency credit line guarantee scheme (ECLGS) and restructuring. Within corporates, Srei group, Future Retail, Shapoorji Pallonji and MMTC remain stressed.”