SP Group hits a speed bump on Asia’s largest private credit deal

The Reserve Bank of India (RBI) has raised a red flag over capital adequacy requirement for Sterling Investment Corporation Private Limited (SICPL), which is looking to pledge its stake in Tata Sons

The Shapoorji Pallonji Group's bid to raise a fresh $3.3 billion from a clutch of large global investors has hit a roadblock, with the Reserve Bank of India (RBI) raising a red flag over capital adequacy requirement for Sterling Investment Corporation Private Limited (SICPL), which is looking to pledge its stake in Tata Sons, sources told Moneycontrol. The proposed transaction, if it materialises, will be the largest structured credit deal in Asia to date.

SICPL, a systemically important non-deposit-taking NBFC or non-banking financial company promoted by the Mistry family, holds a 9.185 percent stake in Tata Sons Private Limited—the holding company of the Tata Group—and has pledged its shares as part of the latest fundraising plan. Another 8.815 percent stake in Tata Sons held by the SP Group is through Cyrus Investments, bringing its total shareholding in Tata Sons to 18 percent.

While SICPL itself remains debt-free, the issue arises from the financial guarantee it has provided for the group’s proposed borrowings. The loans are at the group level, but if SICPL is deemed to be backstopping these obligations, it could be required to hold 15 percent of the $3.3 billion as capital, which amounts to around Rs 3,800 crore, sources told Moneycontrol. SICPL’s current capital base is around Rs 700 crore.

An email query sent to a representative of the SP Group remained unanswered at the time of publishing this report.

The funds will essentially be used by promoter entities to refinance promoter-level debt.

Although, according to rating agencies, SICPL’s credit profile is healthy with a conservative capital structure and comfortable coverage indicators, sources said that as per RBI norms that came into effect from October 1, 2022, mid-tier NBFCs (NBFC-ML) are mandated to maintain a minimum Common Equity Tier 1 (CET1) capital ratio of 9 percent of risk-weighted assets on an ongoing basis, as per the scale-based regulation framework. This regulatory requirement has added complexity to SICPL’s role in the fundraise, as it must ensure compliance while supporting the broader SP Group’s financial commitments.

Sources said that the SP Group, in its communication to the banking regulator, has pointed to its significantly low loan-to-value (LTV) ratio. “If the SP Group’s entire 18 percent holding in Tata Sons is valued at $34 billion, SICPL’s 9.185 percent stake alone would be worth approximately $17 billion. Given that the pledged shares are backing a $3.3-billion fundraise, the LTV ratio stands at just 20 percent, making it a conservatively structured transaction,” said a person familiar with the matter. “Additionally, the group has given an undertaking to the RBI that it will increase the capital  adequacy over a period of time.” the person added.

“This is an unfair interpretation (by the RBI),” said a senior banker. “The liability on SICPL is a remote contingent liability. For it to be triggered, the group would have to default, then Tata Sons’ shares would have to be monetised, and only then would any liability fall on SICPL.” Experts tracking the development believe that the capital adequacy requirement is misplaced in this scenario. “Given that a bouquet of other assets, including Tata Sons shares, are being pledged, there should be no impediment to SICPL backing the fundraise,” said a senior banker, on condition of anonymity.

The SP Group has written to the RBI stating that stopping the fundraise over what is effectively a remote contingent liability would be unwarranted. Moneycontrol reported on January 30, citing sources directly aware of the transaction, that the SP Group is nearing a deal with a consortium of global alternative asset investors to refinance its outstanding debt of approximately $3.3 billion. The deal was initially expected to close in March.

The report further said that the refinancing will be primarily handled by global alternative asset investors Davidson Kempner and Cerberus Capital, with partial financing from Ares and Farallon Capital, both of which will roll over a portion of their maturing debt. The SP Group had previously been in discussions with Power Finance Corporation (PFC) to refinance the upcoming maturity at a lower rate. However, the loan was ultimately not approved by PFC’s investment committee for unspecified reasons, the sources added. Notably, SICPl had secured $2.6 billion in 2021 from alternative investment manager Ares Management and hedge fund Farallon Capital, with a tenor of three and a half years.