Shriram Transport Finance Company – Will there be a Rating Downgrade on SVL Default?

Shriram Transport Finance Company – Will there be a Rating Downgrade on SVL Default?

Immediately there is unlikely to be any rating action on Shriram Transport bonds as SVL repayment is due next year and the group has clarified that they will honour all commitments through their own resources. However, uncertainty will persist on the bonds and markets may turn cautious leading to lower liquidity and wider spreads.

Shriram transport finance company has provided the guarantee for NCDs worth Rs 8.7 billion issued by SVL Ltd., an unlisted Shriram group company. SVL is under financial stress, and NCD repayment may be an issue. Other group companies of Shriram Transport could aid in repayment, but if a guarantee is invoked and liability devolves on Shriram transport finance company, the company would see deterioration in balance sheet ratios.

Issuer Data

The AA rating for the Rs 6.5 billion worth of NCD programme is mainly due to the unconditional and irrevocable guarantee from Shriram transport finance company. The corporate guarantee ensures that the NCD investors would get paid on time even if the issuer does not pay and the Shriram transport finance company guarantee is required to be invoked by the debenture trustee.

SVL Ltd– The erstwhile  Shriram  Industrial  Holdings  Limited, is the ultimate holding company of the non-financial/ manufacturing businesses of the Shriram  Group.  The promoters and key management personnel of the Shriram  Group hold all the shares in SVL  through  SVL  Trust.  The key operational entities under SVL  are  Shriram  EPC  Limited ( FY18 PAT Rs 0.02 billion Loss),  Orient  Green  Power  Company  Limited (FY18 PAT Rs 0.71 billion Loss),  Haldia  Coke  &  Chemicals  Private  Limited,  Shriram SEPL  Composites  Private  Limited,  and  Bharath  Coal  Chemicals  Limited.

SVL’s subsidiaries like Shriram EPC, Orient Green Power, and Haldia Coke are facing insolvency proceedings in the National Company Law Tribunal after a loan default.

STF Key Data

Shriram transport finance company share came under pressure, as market turned cautious of a guarantee of Rs 8.7 billion provided by the firm for its unlisted subsidiary (SVL Ltd).SVL had issued Rs 6.5bn of zero coupon NCDs in June 2015 (11.25% IRR), maturing on 28 June 2019. Outstanding guarantee of Rs8.7 billion as of March 18 includes accrued interest. Shriram transport finance company in its 2018 annual report mentioned about Rs 8.7 billion corporate guarantees, prior years annual reports do not include disclosure of the guarantee.

Cash flows at SVL subsidiaries may be inadequate to service the NCD, but other companies within Shriram group may potentially refinance or aid in repayment. However, if SVL defaults on the NCDs and the guarantee is invoked, then Shriram Transport book value will be affected. As of March 2018, Shriram Transport book value/share is Rs 554, after adjusting for Rs 8.7 billion NCDs guarantee, book value/ share will be reduced by 6.91% lower to Rs 514.

Shriram Transport Finance Company clarifies on NCDs issued by SVL Ltd – Company has not extended any fresh guarantee for SVL Limited. The corporate guarantee is secured by the pledge of shares of SVL Limited.
The NCDs fall due for maturity after a year from now in June 2019. SVL Limited, its Promoters / Promoter Group, and its associates, have enough resources to honour the payment of this loan whenever due and payable .