Developers who borrow a lot of money by buying shares of companies end up in the soup because the market crisis undermines the value of the collateral and leads to loan commitments that force them to repay loans in advance, contribute more shares or, in the worst case scenario, make their company lose control when those shares are sold in the market.
Data on the shares promised by the promoters of the BSE 500 showed that in the midst of the bloody slaughter in recent weeks, the value of the promised shares has fallen by almost 30%. The total value of the shares pledged by the founders of these companies was March ₹1.27 trillion and at December 31st – ₹1.78 trillion.
Future Retail, SpiceJet, IndusInd Bank and Gayatri Projects are among the companies whose shares have fallen sharply in value. To date, these companies have experienced one of the largest percentage decreases in the value of collateral. Regarding the absolute value of the pledged shares, Adani Group, Future Group, JSW Steel and Emami Ltd., some of these companies have an interest in the company.
In some cases, credit rating agencies have identified the risk of falling prices for the shares earned. The 20th. On 3 March, the rating agency Icra downgraded the promoter of the Future Corporate Resources Group to below investment grade (BB+), reflecting the high level of indebtedness and a significant increase in the proportion of promised shares due to the fall in share prices.
Bonds for listed securities are typically a segment where standard agreements or trigger levels exist and promoters need to reconstruct collateral by offering more shares up to a certain point and then offering a cash margin, according to Rakshat Kapoor, fund manager and investment director of the Centrum Kredietmogelijkhedenfonds.
In cases where absolute leverage is high, the sponsors will not have pledged too many shares by each lender and will not be able to pledge more than a certain level, as this starts to influence the operating companies’ borrowing obligations. So the organizers will have to raise money to complete their deposit, he added.
However, some promoters are unlikely to be able to cope with the situation, as share prices have fallen sharply and advertising balances have been extended. The experts noted that there may be several cases of loan restructuring or strategic transactions where the promoters are unable to provide new collateral.
Creditors could have given more time by extending the deadline. Some lenders are restructuring these loans for force majeure reasons, says Sudhir Dash, founder and CEO of the consulting firm UnaPrime.
In situations where loans have already been restructured and sponsors are unable to raise more capital, lenders could try to take control of the underlying assets and reach a strategic agreement, he added.
According to Kapoor of the Centre Credit Opportunities Fund, when leverage is low and activities are normal, lenders prefer to restructure loans rather than sell shares on the open market. It’s not a business event, it’s macros. In cases where the promoter’s leverage is low and the company is doing well, he can therefore decide to restructure the loan by taking additional collateral and imposing a certain postponement of the loan repayment, Mr Kapoor said.
A call for pledging shares at these prices and in these markets will further depress the share price, and moreover, given the market situation, you still won’t have any buyers, he added. Mr Dash added that at such times proponents may use certain sources of capital, such as funds for specific situations, but these are relatively more expensive sources.
Although there are certain types of capital on the market that can be used by developers, most are expensive. Private equity investors, such as special situation funds, will see many investment opportunities in the coming months, he said.
However, it will not be easy for overweight developers to attract new capital to overcome the current difficulties. Sponsors wishing to raise fresh capital may face difficulties given the high volatility of stock prices, says Ajay Garg, founder and CEO of Equirus Capital. With a gradual correction of the share price over a certain period of time, the promoter has time to manage its liquidity and arrange additional securities. But in today’s market, where shares are trading at 8 to 10 per cent a day, some promoters will find it difficult to find the time to build up a new deposit, he said, adding that promoters who are at a comfortable level of liquidity are also using this situation as an opportunity to buy shares in their own company.