MC Explains: Why SP Group wants to pledge Tata Sons shares and Tata Trusts are concerned?

This refinancing is very important for the SP Group to meet near term debt obligations and to bring down cost of financing.

Disagreements have been brewing between Tata Trusts and SP Group in the last few months over the transferability of shares held by SP Group in Tata Sons. The SP Group wants to roll over its pledged shares in Tata Sons to avail a refinancing worth $2 billion. However, Tata Trusts are opposing this move on account of certain restrictions applicable on transfer of Tata Sons shares. Moneycontrol explains the reasons behind why SP Group wants to pledge these shares and the stance being taken by Tata Sons. According to data, SP Group owns 18.5percent percent of Tata Sons.

What does SP Group want to do?

The SP Group wants to roll over or extend the pledge on Tata Sons shares to avail refinancing worth $2 billion. This refinancing is very important for the SP Group to meet near-term debt obligations and to bring down cost of financing. The group is said to be in talks with various lenders including Power Finance Corporation (PFC) for fresh loans. To be sure, this is not the first time that SP Group has pledged the shares of Tata Sons as collateral for availing loans. The group has already pledged its entire 18.5 percent stake in Tata Sons as collateral to avail financing, as per various media reports.

Why are Tata Trusts opposing this pledging?

Following the shareholder dispute between late Cyrus Mistry of SP Group and Tata Sons in 2017, Tata Sons converted itself into a private company. According to the rules, the shares of private companies are not freely transferable and if any shareholder wants to part with his stake, that will need approval from Tata Sons.

ALSO READ: Tata Trusts says SP Group’s pledged Tata Sons shares non-transferable: Report

In the current refinancing, the concerns of Tata Sons seem to be around spillover risks if the pledges are rolled over. In case of any default on debt obligations by the SP Group, lenders will have powers to invoke pledge on collateral provided—in the current case the collateral would be shares of Tata Sons. They also have powers to sell these shares to a third party to recover the dues. However, such an exercise could lead to change in shareholding at the group level for Tatas as it will change the cap-table of Tata Sons.

MC Explains

What debt facilities has the SP Group already availed?

Currently, there are three major debt facilities outstanding at the SP Group. The first debt facility was availed by Evangelos Ventures – a fully-owned subsidiary of SP Group. Evangelos raised debt of Rs 12,630 crore through unlisted bonds.This debt matures on March 31, 2025 and upon maturity, the SP Group will have to pay the lenders nearly Rs 17,000 crore.

The second debt facility was availed by another SP Group entity called Goswami Infratech through listed bonds to a tune of Rs 14,300 crore. The tenor of these bonds ends on April 30, 2026 when the SP Group will have to pay back Rs 24,000 crore to the lenders.

Third debt facility was raised by group entities Sterling Investments and Cyrus Investment from HDFC Bank to a tune of Rs 4,000 crore. No other details about this debt facility are in the public domain.

Why is the transaction important for SP Group?

The SP Group has been facing steep challenges due to high debt levels. The group has also availed loans at steep interest/coupon rates. For instance, the loan availed by Goswami Infratech carries an interest rate of 18.75 percent. It also has the Most Preferred Nation (MFN) clause, which implies if the SP Group raises debt from a different lender at a higher interest rate subsequently, then the lenders of Goswami will be entitled to the higher rate. The group was also banking heavily on the timely listing of a subsidiary Afcons Infrastructure on stock exchanges. The SP Group had planned to prepay a part of their debt from proceeds of the Afcons initial public offering. The company has already filed its draft offer document. However, the IPO is yet to be launched.