Axis Capital’s structured finance team is proud of its “unblemished track record of ‘No Default’ in any transaction with 100% investor money”. But the underwriting of Rs 2.6 bn of non-convertible debentures (NCD) of Sojo Infotel in March 2021 may result in its inaugural blemish on March 25, 2024, when the maturity date falls due. Stakeholders in Axis Bank, as well as financial sector regulators, need to analyse the anatomy of this deal to appreciate how Axis Capital and Axis Bank do underwriting and risk management.
Axis Capital, a 100% subsidiary of Axis Bank, is engaged in investment banking, institutional broking and distribution of financial products. Its innovative structured finance division has raised US$ 1 bn for companies and promoters in India. On March 25, 2021, Axis Capital structured and successfully privately placed with three investors Sojo Infotel 8.35% coupon per annum debentures of a total value of Rs 2.6 bn. The debentures had a call option on September 25, 2023 and redemption date of March 25, 2024. The credit rating agency, CRISIL assigned a provisional rating of ‘AAA (CE)’ with a ‘Stable outlook’ for the issue.
An unusual feature of the issue was that Axis Capital, as the sole arranger of the NCD issue, guaranteed repayment of the debentures. As Crisil Rating stated,
The underwriting commitment from Axis Capital is unconditional and irrevocable, and it covers the whole quantum of the repayment obligation that may arise on redemption of the NCDs (including entire principal + accrued coupon).
The debenture issue had a call option on September 25, 2023 which Sojo Infotel did not exercise. As a result it triggered an asset sale event, increasing the risk of the liability falling on Axis Capital if the company failed to meet the redemption on March 25, 2024. The holders of the NCD issue were Aditya Birla Finance Private Ltd, Shriram Foundry Private Ltd and Sun TV Network Ltd.
List of NCD Holders as on March 31, 2022
As per the Debt Memorandum of the issue a minimum 26% of the equity of Lava International, an unlisted subsidiary of Sojo Infotel were pledged to Axis Capital as security. The pledged shares were valued at three times the value of the debenture issue. Lava International’s Initial Public Offering (IPO) was scheduled to take place 15 months from the date of allotment of the debenture issue of Sojo International. Personal guarantees and assets of the promoters were also pledged for the issue.
Just before Lava International filed its draft red herring prospectus (DRHP) on September 27, 2021, UNIC Memory purchased a stake at Rs 110.67 per share from the promoters, valuing the company at around Rs 60 bn. The promoters utilised the proceeds to partly reduce the principal and interest repayments, thereby reducing the outstanding NCD amount to Rs 1.74 bn. Based on this valuation, Axis Capital had more than adequate coverage for its off-balance sheet exposure.
Unfortunately for Axis Capital, Lava International found itself unable to proceed with the IPO, as the capital market regulator raised some issues which the company was unable to address. As a result, the underwriting risk for Axis Capital significantly increased. The failure of the IPO resulted in the promoters being unable to honour the call option to redeem the NCDs on September 25, 2023, thereby triggering an asset sale event. Both these issues were compounded by the arrest of Hari Om Rai (single largest promoter and managing director of Lava International) by the Enforcement Directorate on October 11, 2023, on charges of money laundering. In such a scenario, the prospect of Soji Infotel redeeming the NCD appears to be bleak.
The last valuation of Lava International appears inflated, as Sojo Infotel and Axis Capital were unable to find buyers for Lava International prior to the call option, and the valuation after the expiry of the call option can only have worsened, since the main promoter is in judicial custody and to date no buyer has emerged. Therefore, while Axis Capital may, on paper, have adequate security to cover the default, in reality the value of the security may be lower than the loan amount.
Stakeholders in Axis Bank need to evaluate the underwriting and risk management in Axis Capital and Axis Bank’s due diligence over its subsidiary. At the time of the issue in March 2021, Sojo Infotel was a loss-making holding company with marginal assets and no income, and by FY2022 the company reported a negative net worth of minus Rs 256 mn. The company was in no position to service the debentures raised, and hence the debenture holders required the underwriting commitment from Axis Capital if Lava International failed to have its IPO. In effect the debenture issue was a bridge loan to Sojo Infotel till Lava International had its IPO.
Financials of Sojo Infotel – FY2018-1HFY2021
Axis Capital Income and Net Profit
DISCLOSURE
I, Hemindra Kishen Hazari, am a Securities and Exchange Board of India (SEBI) registered independent research analyst (Regd. No. INH000000594). Please see SEBI disclosure here. Investment in securities market are subject to market risks. Read all the related documents before investing. Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.The securities quoted are for illustration only and are not recommendary. I own equity shares in Axis Bank. Views expressed in this Insight accurately reflect my personal opinion about the referenced securities and issuers and/or other subject matter as appropriate. This Insight does not contain and is not based on any non-public, material information. To the best of my knowledge, the views expressed in this Insight comply with Indian law as well as applicable law in the country from which it is posted. I have not been commissioned to write this Insight or hold any specific opinion on the securities referenced therein. This Insight is for informational purposes only and is not intended to provide financial, investment or other professional advice. It should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.
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