Softbank-backed hospitality firm Oyo on July 16 closed a debt financing round of $660 million from global institutional investors with an aim to retire some of its existing debts and pump up its operations and product technology.
This happens at a time when the board of the company has asked the hospitality firm to start getting ready to go public even as the pandemic continues to disrupt the travel space.
In an interaction with Moneycontrol, group chief financial officer Abhishek Gupta talks about the structure of debt financing which is new to the Indian market, company's IPO plans and market recovery expectations among other things.
Q. What are the payment terms? By when will it have to be repaid?
This is an opportunistic financing by Oyo to raise a long term non-diluted stable capital from marquee institutional investors. We are the first Indian company to access the US leverage finance market in the form of term loan B. We are the first Indian startup to be independently rated by Moody's and Fitch. Moody's gave us a B3 stable rating and Fitch has given us a B flat rating. This is equivalent or at par with global peers.
You may have heard the news of Grab raising $2.2 billion in a similar instrument. They were also rated B3 and B flat. So this puts us in direct interaction with some of the best investors in the world.
This is a five year term loan. It has an annual amortization of one percent over five years and a bullet repayment of 95% at the end of the fifth year. So think of this as a fully five year term loan.
Q. Isn't Oyo's rating from Fitch and Moody's putting it in the non-investment grade category?
Rating agencies look at a variety of criteria and they rate companies between A, B and C. For example when Uber went out in 2017 or 2018 for first debt issuance, they were given a CCC rating. Grab, which went out recently was rated B3 similar to ours. We are not profit making right now... we are obviously not there yet. But within our peer set and within the contours of the environment that we operate in, B3 and B flat are very good ratings as a debut first time issuer ratings and as we further embark on our journey on the path to profit and further these ratings should improve and go up.
Q. For this round, is there any security of collateral being given?
This is a secured financing taken in our overseas subsidiaries of Singapore and Netherlands and as you know we are a tech company so we don't have any physical assets or properties to give collateral so this is based on our overall corporate guarantee from the Oyo parent.
Q. Only from the parent entity or also from the promoters?
Not from the promoters, just from Oravel Stay Pvt Ltd, the holding company. There is no promoter involvement here, neither Ritesh (Agarwal) nor any investors.
Q. What are the restrictive covenants or consent rights that the lenders have been given ?
This has no maintenance covenants so generally if you take a term loan it has got quarterly EBIDTA testing that you have to do this much EBIDTA every quarter otherwise you are in default. This is what we call a long term covenant light structure which means we don't need to perform any particular EBIDTA targets on a quarterly basis. There is a minimum cash requirement which is there with every debt facility like a reserve account.
Q. You plan to use a large chunk of this funding to retire the existing debts. What's the outstanding debt of Oyo?
Suffice to say that after this, this will be the only outstanding debt. We have consolidated all our debt positions and said that this was in some way an opportunity for us to simplify our debt strike. Now the only debt which will be there in Oyo will be this $660 million.
Q. Will this also include the debt Ritesh Agarwal had taken during one of the previous rounds?
This is at the company level. So neither any promoter's involvement in terms of guarantee nor any source of proceeds or use of proceeds towards any promoter obligations.
Q. This is the first of its kind of debt we are seeing in India being raised by an Indian company. What led to Oyo opting for a term B loan?
It is a very market opening opportunity. We learned a lot from our peers. Grab is a stakeholder in Oyo. They went for this financing. Look, we want to be more and more public market ready and there is no better way to prepare yourselves than opening up your books to the rating agencies. Dealing with rating agencies is one of the toughest things in the ecosystem. We started this process in January when we got ourselves rated with Moody's and Fitch and then we tested the waters a little bit to see what the appetite was like.
You are right, this is the first instrument by an Indian company and it comes with its own challenges. There are regulatory restrictions, security enforcement protocols that US investors are, let's say, need to be educated about. So we did all that and we got a good sense that this could be a success and therefore went ahead. May 21 was when we launched it and then it has taken us a month to close the transaction and now we are announcing it because all the necessary approvals are in place.
Q. Today Paytm came up with its draft red herring prospectus (DRHP), Zomato launched its IPO earlier this week. How do you see the market maturing for startups in India?
These are very positive developments. Earlier we used to hear from investors that there's only three consumer internet stocks in India to deal with. People were always skeptical about how they will get liquidity and how markets will reward investments in India. All these IPOs usher a new era to the Indian consumer internet ecosystem. Today's close of Zomato was oversubscribed by 30 times is what I heard and it's great. This is very positive for the entire ecosystem.
Q. By when do we see Oyo going for an IPO?
We are working on the readiness. As you know, there's a lot of nuts and bolts and background work that needs to be done. Our audit committee and board has asked us to be ready for the public market event by the end of this year and after that it will be a combination of looking at the overall COVID recovery, the market appetite, market readiness as well as our internal readiness. We have not put a time or date.
Q. The last one year has been quite rough for the hospitality industry. What's the status of the business in the current environment? What convinced the investors to put in money in the company during such a time?
The COVID waves are directly correlated to our business recovery. When we were in the January-Feb-March of this year in India between wave one and wave two, our business was looking at very fast recovery, almost 50-60% of pre-COVID levels in India. We were actually profitable for those three four months in India and then came quarter two when we went back into the red because bookings dropped and the revenues dropped.
As of the last two weeks, we have seen a surge of business coming back and similar signs you see across the world. In fact Europe is seeing one of the strongest summers where people want to venture out. South East Asia is a little bit of a mixed bag with Indonesia going through a tough time but what we are seeing is that the resurgence post COVID is quick and sharp. We remain cautiously optimistic. There are some risks that remain and we will see through them.
I think what investors saw during these discussions is that the long term fundamentals of the business are very strong. There are short term hiccups that come with each subsequent wave in each subsequent market. But when you look at Oyo's diversified portfolio across the geography and the resurgence that happens post a wave of infections goes down then it gives investors a strong reason to believe that the business model is resilient.
Q. What's the way forward for Oyo?
This has been a tough period for us but at the same time we are transforming ourselves into a tech-first product led company. Today 85% of our consumer complaints are handled by chat bots. 80% of our partner support system are led by automated response systems. This has also altered our cost structures, margin profiles and gross margins. Even though the market recovery is still some way to go but as soon as that recovers, we see the overall company reaching a group level profitability target pretty soon.