Mirach Cap to pump in $2 bn into Sahara

Below is the verbatim transcript of the interview.

Q: First to begin with there has been a fair amount of reporting with varying degrees of accuracy with respect to the numbers involved in this transaction. Of course large numbers is what we are talking about, access of USD 1 billion and of course last two weeks have been quite fluid in terms of arriving at the finality, arriving at the final version, the final transaction. So, if we can just begin with the broad contours, the numbers if you can share with us, going forward. What are the kinds of investments, what are the kinds of loans that you will be extending and what are the broad contours looking like? A:  The transaction has actually been a part of debt and there has been a junior loan that is the phrase that has been coined. The senior loan in this piece has been USD 882 million which is the piece that Bank of China has on these properties.The second component is the USD 650 million piece which is the piece earmarked for the Sebi Sahara fund. Then there is an additional transaction which is an investment in Sahara Star Hotel and the resorts vertical of the Aamby Valley project. So collectively between these various projects we are able to get to a valuation of USD 2 billion which is how we are extending this loan. Q: Looking at the fine print here as an investor, as a lender, as a junior lender to use the term that has been coined, how comfortable are you with the idea that the funds that will be deployed here nearly USD 2 billion is what we are talking about, in rupee terms that is vaguely around Rs 12,000-13,000 crore. How comfortable are you with the idea that the money here will not be used for any greenfield or brownfield projects, will not be used for any capex plans, not for any further investments but for meeting the bail requirements? Is that a concern here when you are looking at it as a lender? A: I have an instruction in this transaction, it has been our core focus and one of the primary concerns to be as compliant with the honourable Supreme Court as well as with the SEBI Sahara fund requirements. Therefore any fund that gets deployed in this transaction will be compliant with the requirements of SEBI. Q: The big question here that everyone is asking as to what is it that Mirach Capital saw as far as these operations are concerned? Of course when we talk about Sahara looking back at the last 3-4 years, they have spent a better half of these last 3-4 years dealing with the regulator, dealing with a number of legal challenges that have been thrown at them. There have been adverse Supreme Court (SC) orders. So there are a number of litigation worries, a number of regulatory tussles is where Sahara finds itself. In the middle of all this we find USD 2 billion lifeline being extended. So the basic question is why this investment, what is it that Mirach Capital was able to spot that the others have not been able to see so far. A: These assets that are in the centre of this drama are Mona Lisa's of the real estate industry. People like Donald Trump have compared it to the Mona Lisa in some ways. The Plaza Hotel, the Dreams Hotel, the Grosvenor House Hotel, Sahara Star, Aamby Valley, these are all marquee assets and in their own ways landmarks. Having said that, I don't see myself or Mirach taking an exposure on Sahara as a corporate entity as much as we are taking an exposure on these assets. There is a great turnaround story that is prevalent here for these assets. The negativities of the press and this litigation over the last 4-5 years have led these assets in some way, shape or form to be neglected. As a value driven investor, Mirach sees an opportunity to turn these assets around over the next year or so and assist in improving the values of these assets far greater than what they are today. Q: So are we to assume going forward that, that is perhaps the end game that we are looking at as far as Mirach is concerned and not 11-12 percent interest income but rather the bigger picture here the assets that are at play, is that the end game?  A: Absolutely, the end game here is if the loans play themselves out over the course of the year, and if Sahara is in a position to settle these debts that is fantastic. In the event, there is a forced sale maybe through Supreme Court or Sahara's own decision, Mirach would like to be the number one group to have that reservation. We have means of rights of first refusal to acquire these assets at a discount from the highest cash offer that comes in the market place at that time. Q: We have spoken about the end game with respect to Mirach and those three overseas properties and that has been the focus area through out this entire transaction. Of course in conducting this transaction, the multi billion dollar transaction there is also the element of right of first refusal (ROFR) to ensure that the property finally rests with the group. Can you expand on that to give us a better picture of how Mirach is going about eyeing these properties and what measures have been deployed to ensure that Mirach retains control on these three marquee properties? A: ROFR obviously stands for right of first refusal. The way rights of first refusal is structured is they kind of give you exclusivity or they do give you an exclusivity to be the first man in line to acquire the asset. Therefore if there is an event of default and if there should be a public sale of these assets in whatever shape or form, Mirach would have the first right to purchase the asset. Basically means we can match these assets or we can match purchase price with any other offer or any other cash offer for that is received in these assets.Obviously in making this loan the advantage has been the discount that we would be able to acquire these assets at from the highest market offer that is received in an all cash form. So that is obviously an insurance mechanism that has been put in place that gives us the favourite exit should it ever transpire like that.Q: This is from what we understand a one year loan. Going forward at the end of one year if Sahara is not able to repay the loan with the interest, are we to assume that refinancing operations will safely be ruled out?A: Correct, that would be accurate. Refinancing would be ruled out at that juncture. This would be structured in that event for an acquisition. Q: The payment obligations again if one were to go by market regulator again at the cost of sounding redundant but in excess of Rs 40,000 crore is what we are talking about. So these are large numbers and the interest if again going by the market regulator, the interest as per them keeps accumulating so this is a very large number that we are talking about and time and time again we have seen the apex court raise the issue of being vary of Sahara loosing control of these three marquee properties that we are talking about. So, going forward with the end game that Mirach has in mind, how confident are you going forward of being able to enforce your rights as a lender and take control given that there are number of permutations and combinations at play. The Supreme Court, the market regulator all would like to play vary. There is of course the Supreme Court order of 2012 to be kept in mind. So a number of issues at play here. How confident are you of being able to enforce your rights and actually taking charge at the end of one year? A: Extremely confident. We have retained some of the best law firms in the world Paul Hastings  which happens to be the leader in this space is representing us in  structuring an adequate solution which is iron clad and without any issues. So, I feel very certain that we will be very comfortable if there was an event of default a year down the road. Q: The exposure that Mirach Capital has taken so far, as far as these three properties are concerned, is about USD 2 billion. If just to quote some figures, Sahara from what I understand from the valuation that were submitted before the apex court, they had valued these three properties at about USD 1.78-1.80 billion. Given the fact that these properties are high in demand, would you consider this as deal given the numbers involved? A: Valuations often are done in a very conservative fashion especially when banks do them. There could be different types of valuations that are conducted more often than not banks tend to choose income based valuations. Income based valuations are pegged on cash flows.Unfortunately these properties have been neglected over the last few years. Partially because of the stresses and the pressures and litigations that Sahara is under. Having said that these valuations tend to make big swings at the same time.  It is all based on which valuations model you choose. In my opinion once assets have been assisted in having a turn around, cash flows are improved I think it is very easy to see that the value on these assets are in excess of USD 2 billion. This is partly the reason why there has been such a demand because I think most investors see that as the value play. The neglect has caused for these assets to suffer and therefore these valuations are depressed compared to where they probably should be. Q: Another one of the important issues is that you have been interacting with the Sahara Pariwar with Subrata Roy from very close quarters and that is a proximity that none of the other observers have had in a very long time. So looking at this entire issue, if one were to get your perspective as far as this tussle with the market regulator is concerned, how would you look at it? The market regulator is pressing very hard and in fact day by day we find new figures coming out with the market regulator adding more interest income to that original figure of Rs 17,400. Now we understand of course that figure being north of Rs 40,000 crore.    And that is of course one side of the story, the other being of course the Sahara's version of the story that the money has already been repaid, that the onus is now back on the market regulator to verify facts and this is of course one position that off late has found traction with the apex court. The apex court also by way of its observations expressing a similar view that the onus at some point also falls on the market regulator to verify these claims. So as an observer if one were to have your perspective, of course given that proximity that you have shared over the last few months. A: I have had the opportunity to learn about both sides of the stories and I would refrain from passing any kind of judgement on either side because that is something for the Apex court and the judicial committee to decide on. It is not my place. However in the view of few interactions that I have had with Subrata Roy in close proximity, I can tell you that he seems to be a very driven person and certainly rational. I sense a great deal of commitment within him to resolve this. This has partly been the reason why the structure, when we first approached them was an acquisition and we were here to actually acquire the assets. It was through my interactions with Subrata Roy that I finally ended up agreeing to a loan structure partly because I kind of see his drive at trying to resolve this and we all appreciate a comeback story and he certainly seems resourceful enough that he may have a comeback story to deliver. Q: But at the same time, one also has to keep in mind, that this is very unique situation that we have where a billion dollar deal has been worked out from within the premises of one of the most notorious prisons in the country. This is a very unique situation. This is where we also find the Supreme Court cutting concessions to Subrata Roy given that he had shown the bonafides of wanting to go forward and resolve the situation as you put forth. As a global investor who is looking to invest billions of dollars of money, was there an element of doubt in perhaps interacting with the Sahara Pariwar, given that Subrata Roy, Sahara Shree as he is often referred to, the patriarch of the Sahara Pariwar, was behind bars. Did that add an element of doubt, element of risk? How did you perceive all of that? A: Absolutely, in any relationship when there is the beginning of a relationship, there is always a doubt, scepticism, concern and two sides of the relationship always come at it guarded. Similarly I too as well as Mirach had come into this transaction in a very guarded sort of a sense.However, over the last five months, the time frame that it has taken us to do diligence this story, this situation, the complexities, we have found comfort that there is a way to transact this without getting involved in any of the litigious matters that are prevalent between the market regulator and Sahara and keep the focus of Mirach on these gorgeous assets. Q: Now when we look at the bigger picture here with respect to Sahara, there are a number of assets at play, we have seen a number of advertisements with respect to Sahara's asset base being massive but equally massive are of course the obligations that SEBI, the Market regulator would like to put upon the Sahara Pariwar at this point. They of course have come out with various litigations where they are claiming numbers as large as over Rs 40,000 crore, the repayment figure with respect to Sahara. Going forward, if we were to see more liquidation of assets by the Sahara group, would Mirach as a potential investor be willing to consider more opportunities, more synchronisation perhaps between the two groups? A:  The amount of asset exposure we are looking at the moment with these three or four transactions or four properties would be for the time being the max exposure we would be looking at. That does not mean we do not keep an open mind. It would depend on what assets are on the table so to speak. But Mirach's focus going into 2015 is a broader story about getting into India, about other opportunities in other sectors also. Q: I am sure you have the backing of the best of legal eagles but just for your perspective on this entire issue again, the dues that are payable by Sahara do not necessarily fall in the domain of statutory dues but these are dues that are designed to be paid by way of the Supreme Court order which has upheld the SEBI order so again there are issues at play here. At this point would the dues payable to the lender, in this case Mirach group, would that be on a higher group pedestal than what the Supreme Court would enforce with respect to the other dues? A: Typically when these transactions are structured, the international assets that we are talking about are in different jurisdictions therefore a lender gets to claim a first charge against them. So, yes, there would be on those assets a higher claim, much like Bank of China has the first claim on these assets currently. Therefore this would be replaced by Mirach, and Mirach would maintain the first charge as well as the second charge on these assets. So, if there is any additional liabilities that Supreme Court or SEBI would like to claim against these assets, they would be subordinate to the senior and the junior loan charges. This transaction would be structured as such.Q: But of course looking at the broader picture as you had hinted that you are looking a broader play with respect to the Indian market. There are a number of opportunities you had hinted at. To begin with again, a broad outlook to things, ever since we have had the new dispensation at play with the Narendra Modi led government, there has been a tremendous amount of focus on impressing upon global investors as to why India is the place to be as we come into 2015. There has been action with respect to land acquisition, there has been a lot of action with respect to restoring the power situation in the country, with respect to phasing out old archaic laws. So, this is a work in progress? Of course there are more expectations from the Budget itself. So, looking forward, how has the actions of the new government, the new dispensation affected sentiments overseas with respect to looking at India as an investment destination?A: The way to look at that question is, India has historically been a part of Brazil, Russia, India and China (BRIC) countries. The global environment over the last 24 months will indicate that Brazil with its economic issues currently and market issues right now, Russia with its own sanctions and political complications and China has its own monetary issues that its trying to resolve, kind of economically creates an environment for India to step up as a leader amongst the BRIC countries, coupled with very market friendly political regime that is in power right now, this the right environment for India. I can certainly assure you that their is a global interest in looking to make an investment. When I see the opportunity, Mirach is looking to set up a Non Banking Financial Company (NBFC) to basically have a presence in India and we have even gone as far as to earmark USD 100 million to begin our efforts in India. As we look into 2015 there are some exciting opportunities to look forward to. Q: Of course Mirach has few focus areas such as aviation, such as real estate, so if one were to speak of say aviation, as far as India is concerned it is a growing space, it has attracted a lot of interests over the last couple of years. We have the Tata’s with a couple of JV’s, a lot of interest from overseas. We are also looking at various cases within the country, within the aviation market where there is a cash crunch and where the promoters are finding it difficult to cough up the right amount of cash. So when such an opportunity presents itself with oil of course being another factor, oil in a bear grip as of now. So, are these the right kind of sounds that are currently emanating from the aviation space for you to perhaps consider investing, consider opportunities here? A: Absolutely. There is a movement towards discounted aviation globally. India certainly has a growing middle class which is in need for aviation travel. I also feel because of an improving economy and an improving global climate what you have is private companies increasingly needing charters. So, I do see an opportunity some time in the next two to four years whereby charter flights is certainly a huge growth perspective in my opinion and certainly a market place that Mirach is looking to position itself in the coming years.  Q: What about the current airlines that are currently at play? Again we are looking at a situation where they are suffering from a cash crunch, are there any options, opportunities that you perhaps have been able to sight, or perhaps a bigger play on a full service or a low cost carrier? A: There has been some opportunities that have been presented to me and while I would love to take over all of India, the focus for the time being is these transactions with these properties. Then once we have consummated our transaction here, then beginning to explore these other transactions and other sectors in India.