Mumbai: Indian media giant Essel Group, run by industry mogul Subhash Chandra, is seeking an extension to repay debt in order to avoid creditors liquidating its shares.
The company faces a month-end debt repayment deadline. If that’s not met, creditors can sell shares in the group’s flagship Zee Entertainment Enterprises Ltd. kept as collateral against loans. The case highlights broader risks that borrowings backed by stock pose to the equity market. There’s a lot at stake with share-backed loans currently at about 1.9 trillion rupees ($26.5 billion).
Essel Group’s Chandra is seeking to sell assets ranging from a stake in the nation’s most valuable publicly traded TV network to roads. Shares of his Zee Entertainment Enterprises Ltd. have plummeted to the lowest level in five years.
“We have certainly discussed the point pertaining to the extension as well, purely in the interest of deriving the right value for the precious assets,” said Punit Goenka, managing director and chief executive officer at Zee Enterprises in an emailed response, “The lenders have noted our view and have been extremely supportive.”
The media tycoon’s challenge is the first of what could be a string of tests this year for beleaguered business titans from Anil Ambani to the founders of the Emami Group. They have raised funds to expand their empires by pledging equity stakes in their firms and the clock is ticking as repayment dates loom.
“Not everybody is going to come out of this alive,” said Jayanth R Varma, a professor at the Indian Institute of Management in Ahmedabad, referring to the founder’s funding predicament. “I can’t imagine that all the groups that are in trouble today will be able to sort out their mess.”
Chandra has already sold $614 million of its Zee Entertainment Stake to Invesco Oppenheimer Developing Markets Fund and has agreed to sell his solar power projects for $182 million to Adani Green Energy Ltd. The Essel Group has begun paying back creditors, including about half of the 3.95 billion rupees ($55.7 million) it owes Kotak Mahindra Asset Management Co., Harsha Upadhyay, chief investment officer for the asset management firm said in an interview.
Shares of publicly traded firms with a large portion of equity pledged as collateral risk abrupt declines should lenders move to recover their dues. For instance, Chandra’s Zee Entertainment lost $1.6 billion in market capitalization in a single day on fears that creditors would offload shares. For Anil Ambani’s Reliance group, the sale of shares held as collateral reduced the market capitalization of its companies by nearly 55% in just four days, the group said in a filing earlier this year.
Meanwhile, Reliance Capital, part of Anil Ambani’s group, was downgraded to default grade at Care Ratings Ltd. last week after a delay in coupon payments on some of the lender’s debt. The company said in a statement that the delay was caused by a technical glitch in an exchange filing. A spokesman for Reliance group said that Reliance Power Ltd. and Reliance Infrastructure Ltd. have signed inter-creditor agreements with their lenders and that Reliance Infrastructure “aims to be zero debt” in 2020.
A spokesman for Emami Ltd. declined to comment.
Should Essel group clear its debt hurdles, equity investors will still need to keep a close eye on the progress other conglomerates make in slashing debt, as companies’ credit quality endures the longest streak of deterioration since 2014.
“Stocks are getting decimated on their market cap, some company founders have realized their error and are liquidating assets,” said Sanjiv Bhasin, executive vice-president at IIFL Securities Ltd. in Mumbai. “Prudent risk management is the order of the day.”