A rating action announced on September 29 by rating agency CARE on Shapoorji Pallonji and Company Private Ltd (SPCPL) is indicative of the stress developing on the company’s cash flows. The scenario has worsened in the wake of COVID-19 and due to the ongoing dispute with Tatas, the agency has noted.
What did CARE do?
The rating agency has downgraded the ratings on two instruments issued by SPCPL. Rating on the proposed non-convertible debenture (NCD ) issue has been cut to CARE A- from CARE A+ while rating on commercial paper has been cut to CARE A2+ from CARE A1+, the agency said in a note on September 29.
What are the reasons?
There are two reasons cited for the rating action. One, the non-repayment of Rs 200 crore that was due to Union Bank of India on September 25. Two, the company has already applied for a one-time restructuring (OTR) process.
Has SPCPL really defaulted?
Has the company defaulted on its payment obligations in the typical sense? Not really. According to a CARE official who spoke to Moneycontrol, this is not a default from the point of rating agency’s default recognition norms.
The non-repayment is despite the company having availability of liquid funds in the form of free bank balances of Rs.530 crore (excluding encumbered FDs of Rs 140 crore) and unused CP lines of Rs.400 crore at standalone level.
Could it have paid the dues?
“The firm would have paid the dues in the absence of OTR since it had availability of liquid funds. It didn’t pay because the OTR process is initiated,” said the official requesting anonymity citing the sensitivity of the matter. Had it been a typical default, the rating would have been downgraded to ‘D’, the official said.
What is the outlook?
That said, the agency has taken note of the severe impact on the cash flows of the company.
“SPCPL, being in the construction and real estate sector, has been severely affected due to COVID. Cashflows from operations and asset monetisations have been adversely impacted,” the agency said in its note.
CARE Ratings further has noted that promoter fund raising aggregating Rs.11,000 crore which was initially planned to be completed by end of Q1FY2021 and subsequently spilled over to Q2FY2021 is unsuccessful till date.
This is despite signing a definitive agreement towards fund raising with an FII in the first week of September 2020, for Tranche 1 of Rs 3,750 crore.
What is the impact due to Tata Sons dispute?
SPCPL has attributed the delay in the promoter funding closure to COVID and most recently to the stay order issued by the Supreme Court on pledging the SP group’s shareholding in Tata Sons Private Limited until the next hearing on October 28, 2020, CARE has said.
“This unexpected development led to further delay in the promoter funding amidst ongoing COVID-19 pandemic crisis, thereby severely affecting the cash flows of Shapoorji Pallonji Group (SP Group),” CARE said.
What needs to be watched is whether the company will meet its repayment to other lenders.
How big is the MF exposure?
According to CNBC TV18, mutual funds have a total of Rs 1,232 crore exposure to SPCPL. Of this, Franklin Templeton MF has the highest exposure of Rs 668 crore to SPCPL, while ICICI Prudential Mutual fund has Rs 213 crore. Seven other funds have exposure of less than Rs 100 crore each.
ICICI Prudential MF has clarified that it's exposure is to SP JUHi rated AAA by ICRA and AAA by India Ratings. SP JUHi is a Special Purpose Vehicle (SPV) formed for the expansion of 64.58 km of the Jammu-Udhampur section in Jammu and Kashmir to four lanes on a build, operate and transfer annuity basis of NHAI, the company said.
Resolution of dispute with Tatas key
The rating agency has highlighted the deterioration in financial flexibility enjoyed by the company in the past. Timely resolution with Tata group will be key for SPCPL, CARE has warned.
The promoters of Shapoorji Pallonji group are the single largest stakeholder of Tata Sons Private Limited with an 18.37 percent stake. While in the past the SP Group monetised this holding by pledging it, the recent effort has seen a roadblock as mentioned earlier in this document, CARE has said.
“Consequent to these developments CARE Ratings believes that there is a significant deterioration in the financial flexibility enjoyed by the group under the given circumstances,” the agency said, adding, “Timely resolution of ongoing dispute with TSPL will be critical for SPCPL to meet its debt obligations as well as pending equity commitments towards its subsidiaries and various group ventures.”
CARE, however, has acknowledged the progress made by SPCPL in the reduction of its off balance sheet exposure in the form of financial and performance guarantees given to its subsidiaries and group companies since the last review. However, its achievement has remained below the anticipated levels, the agency noted in its report.