Rating Rationale Brickwork Ratings Assigns BWR AA+ (SO) for the Proposed Structured Redeemable Share Pledge Backed Non-Convertible Debenture issue aggregating `650 Cr of AAA Enterprises Pvt Ltd. Brickwork Ratings (BWR) has assigned the Rating 1 BWR AA+ (SO) [Pronounced BWR Double A Plus (Structured Obligation) with Stable Outlook for AAA Enterprises Pvt Ltd. s (AEPL or the Company ) NCD of ` 650 Cr with tenor of 3 years. Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. BWR has essentially relied upon the draft term sheet outlining the structure of the deal, audited financial results of the issuer AEPL as well as Reliance Capital Ltd (RCL) whose equity shares are provided as security and information and clarification provided by the issuer. The rating factors, inter alia, the strength of underlying security in the form of pledge of equity shares of RCL (Rated BWR AAA) which are listed, fundamentals of RCL and structure of the proposed NCD issue. However, the rating is constrained by reliance on the promoter fund, refinance or alternatively liquidation of the securities to meet the obligations arising from the proposed NCD issue. Background AEPL is a part of Reliance ADAG Group belonging to Mr. Anil Ambani and Family. The company primarily acts as a holding company for the group. AEPL holds 40.07% issued & paid up equity shares of Reliance capital Limited. The board of AEPL consists of Mr. Anil Ambani, Mrs. Tina Ambani and Mr. Hasit Shukla. The Company intends to use the proceeds of the NCD towards General Corporate Purposes. For FY13, AEPL reported operating income of `138.59 Cr, Non-operating Income of `123.05 Cr, PAT of `123.01 Cr, Zero Debt and networth of `2869.22 Cr. NCD Structure The company has proposed to raise this structured NCD of `650 Cr with tenor of 3 years to be used for general corporate purpose. There will be Put Option at the end of 1 st and 2 nd year post allotment. The NCD s have bullet repayment on maturity or on the exercise of Put option. The Coupon will be paid semiannually. The NCD s are backed by way of pledge of equity shares of Reliance Capital Ltd. 1 Please refer to www.brickworkratings.com for definition of the Ratings www.brickworkratings.com 1 8 Aug 2014
Security cover of the pledge shall not be less than 2.25 times the outstanding amount at inception and also during the currency of the NCD s. The security cover shall be calculated on the total amount outstanding on the Facility including Principal, Interest and penal charges if any. The Facility will require a top-up if the cover falls below 1.90 times in form of additional pledge on Listed Shares, within 2 (Two) business days such that the Security Cover is restored to at least 2.25 times as stipulated. If the share price of the listed company falls below 55% of the Initial Value, any subsequent top-up to maintain a 2.25x cover will have to be in the form of cash/permissible investments. Any such cash top up by the Issuer should be transferred in the Designated Account and shall be utilized towards the redemption of the NCD. The Trustee may release, Listed Shares, to the Security Provider in case the aggregate Security Cover exceeds 2.75 times of the Outstanding Amount and any other charges such that the Security Cover after the release of shares is maintained at 2.25 times. The shares shall be released provided the Security Cover exceeds 2.25 times continuously for a period of 30 business days. The Issuer would be required to fund the designated account with respect to payments of Redemption Proceeds/Interest Payments / Put Option Proceeds at least 7(seven) days prior to payment dates (T-7). Other Key Covenants of the Issue Sponsor / Promoter / Promoter Group(s) to maintain shareholding of 100% of equity shares in the Share Security Provider i.e. AEPL. Upon the occurrence of an Event of Liquidation of Security, all of the loans availed of by the Issuer from any Sponsor / Promoter / Promoter Group(s)/ Shareholders, shall be subordinated to the Debentures and none of the aforementioned loans may be repaid without obtaining the prior No Objection Certificate (NOC) of the Debenture Trustee Issuer should not pledge more than 75% of its holding, as on the Deemed Date of Allotment, in Pledged/Listed Shares throughout the tenor of NCD. Total debt of the Issuer to be capped at: `2,000 Cr, with a sublimit cap of `1,000 Cr on fund based limits. Dividend received on the Pledged/Listed Shares should be escrowed in designated amount and amount should be invested in permissible investments or used for payment of interest/repayment to debenture holders The combined promoter equity holding in the listed company should not fall below 40% during the tenor of the NCDs Issuer to ensure that the pledged/listed shares of the listed company should continue to be listed on both NSE/BSE, throughout the tenor of the NCDs www.brickworkratings.com 2 8 Aug 2014
Background of Reliance Capital Ltd (RCL), whose Equity shares are pledged Reliance Capital Ltd., part of the Reliance group led by Mr. Anil Ambani. Group is a diversified financial services company with interests in Asset Management, Insurance Life & General, Finance Retail, Commercial and Home Finance, Broking & Distribution, Asset Reconstruction, Private equity and Proprietary investments among others. Reliance Life and Reliance General Insurance maintained its position amongst Top 5 private sector insurers for the FY 2013-14 Reliance Mutual fund is amongst the Top 3 Mutual Funds in India with Average AUM of Rs.103540 Crores as of March 31, 2014. Reliance capital is the holding company for all the businesses except the commercial finance business which is housed in the company itself. As on March 31, 2014, the Promoter group held 54.1% stake in the company while Foreign Institutional Investors held about 21.1%. Total shareholding of Indian Public was 19.4%, while Domestic Institutions, Banks and Mutual Funds held about 5.4%. Mr. Anil Dhirubhai Ambani is the Chairman of Reliance Capital Ltd. He is a prominent corporate leader with interests in power, telecom, financial services and media sectors. Mr. Sam Ghosh is the CEO of Reliance Capital Ltd. He has decades of top leadership experience in the financial services industry. Financials of Reliance Capital Ltd (RCL) On a consolidated basis, Reliance Capital Ltd. s total income from operations grew marginally by 0.3% to 7,544 Cr YoY. However, net profit declined by 8% to 747 Cr in FY14 due to higher provision for taxes in the year. Net worth has improved to 12,483 Cr in FY14 vs. 11,971 Cr in FY13.On a standalone basis, RCL s Capital Adequacy has declined from 16.99% in FY13 to 16.30% in FY14 though it is above the minimum requirement of 15%. The consolidated entity had a net worth (excluding minority interest) of 12,391 Cr in FY14 11,971 Cr in FY13. On a standalone basis, Gross NPAs improved to 1.88% in FY14 vs. 2.14% in FY13. Net NPAs stood at 1.41% in FY14 vs. 1.40% in FY13. Reliance Capital maintains a diversified funding profile comprising of bank loans, NCDs, commercial papers and corporate borrowings. As of FY14, bank loans comprised the major funding source (41.6% of total loan funds), followed by NCD (39.2%), and commercial papers (19.0%). Rating Outlook The assigned rating is primarily a function of total adherence of the issuer to the term sheet shared with Brickwork and enforcement of security within specified time of occurrence of an event of default. www.brickworkratings.com 3 8 Aug 2014
The Rating is subject to completion and submission of the following documents to Brickwork Ratings: 1. Executed transaction documents that includes the terms in line with the indicative term sheet provided by the company to Brickwork Ratings 2. Legal opinion on the enforceability of the transaction The given rating majorly captures performance of RCL since AEPL does not have operational cash flows and the NCD structure involves pledge of RCL equity shares provided as security. Security cover of 2.25 times provides cushion to investors. T-7 clause requiring the Company to deposit all amount payable under the facility (including principal and interest) in the Designated Account charged to the Trustee at least 7 days prior to maturity date addresses the liquidity aspects to an extent should there is a need to invoke the security. Overall & Stock Market performance of RCL as well as adherence to the structure is a key sensitivity to the Rating. Analyst Contact analyst@brickworkratings.com425-24 Relationship Contact bd@brickworkratings.com Phone Media Contact 1-860-425-2742 media@brickworkratings.com Disclaimer: Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented as is without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons. www.brickworkratings.com 4 8 Aug 2014
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