Hinduja Group is planning to raise Rs 7300 crore via zero coupon non convertible debentures (NCDs) for the acquisition of Reliance Capital (RCap), the sources said. The NCDs are proposed for a maturity of four years and IndusInd International Holdings (IIHL), the Mauritius based entity which is issuing the instruments will end up paying between Rs 12,000 crore to Rs 13,000 crores on the NCDs if the rate of interest is 16 percent per annum, which is common for the NCDs. Care Ratings has given a BBB minus rating to the issue, the sources said. It is the the lowest possible ratings for a security to be considered investment grade.
According to the sources, the challenge is the ratings for the NCDs since the assets of RCap, which are to be acquired mainly consist of insurance business that as per the regulations are not allowed to service interest on debt. In India, promoters cannot raise debt to acquire insurance assets.
Hinduja has appointed Barclays and 360 One as the arrangers and under-writers for the proposed NCD offering. As per the sources, 360 One is arranging Rs 5000 crore, while Barclays has been mandated for arranging Rs 2300 crore. The group had approached three rating agencies , i.e. Crisil, Icra and CARE for the rating of these NCDs.
Further, the sources say that Barclays and 360 One had put two conditions for this NCD issue: Getting minimum two investment grade rating, i.e. BBB for the NCDs, as per the global best practices and listing these NCDs on the stock exchange as per Sebi's listing guidelines.
Now, the challenge for getting the investment grade rating for these NCDs is that the assets of Reliance Capital, which primarily consist of its General Insurance business and Life Insurance business, cannot service any interest or repayment debt of this size.
So, the Hindujas have proposed Zero coupon, interest cumulative debentures, with a maturity period of four years. The interest rate, as agreed upon, may be around 16 percent per annum. At this interest rate, the redemption value of the NCDs, after 4 years, will be around Rs 13,200 crores. This poses a challenge for the rating agencies as they will have to look at the repayment strength and capabilities of RCap's insurance businesses.
An email sent to Hinduja Group on the matter did not receive any response. Their response will be added to the copy as and when received.
This is the first time that for an acquisition of a debt laden company, any group is trying to raise funds through zero coupon NCDs that are listed and traded.
IIHL had emerged as the successful bidder in National Company Law Tribunal (NCLT) for RCap by promising to pay Rs 9861 crore to the lenders. But the Hinduja Group has overshot the deadlines set by the regulator RBI and NCLT to make good the payments. Now the lenders, which are big public sector companies like Life Insurance Corporation (LIC) and EPFO, are seeking interest on the over and above the promised payment for granting the extension in the deadline.
After having won an approval from the National Company Law Tribunal (NCLT) to acquire RCap in a debt resolution deal worth Rs 9850 crores in October 2023, the Hinduja Group company Indusind International Holdings (IIHL) has missed two deadlines for payment to RCap creditors. The last deadline of 90 days ended on May 27. Therefore now, the COC (committee of creditors) did not want NCLT to give any further extension unless IIHL demonstrated tie-up of funds (debt and equity) for the entire resolution amount immediately and all creditors are adequately compensated for delay in payout beyond May 27.
The lenders wanted Hinduja Group and IIHL to be declared a defaulter, seek 12 per cent interest on the delay of Rs 9861 crore to them and seizure of performance and bank guarantee worth Rs 500 crore. They are seeking stricture conditions if at all any extension is granted. This could be a double whammy for the Hinduja's if it has to pay interest to the lenders and also high financing cost for the NCDs.
