How SREI made 200% returns off a Kingfisher loan in 2 years | srei
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How SREI made 200% returns off a Kingfisher loan in 2 years

A daring but well-calculated investment in a loan offered to now-grounded carrier  Kingfisher Airlines  has paid off handsomely for a debt fund run by SREI Infrastructure Finance, more then trebling since in less than two years.

In July 2012, just when troubles for the debt-ridden Kingfisher was picking up, most of its lenders then were looking to rush for the exits and clearly single-mindedly focusing on making their investments whole.

It when then that  ICICI Bank  announced that that a global debt fund, India Global Competitive Fund, run by SREI Venture Capital (a subsidiary of SREI Infra), had bought out its entire outstanding debt exposure of Rs 430 crore towards Kingfisher Airlines.

SREI played its cards well: it bought the securitized debt at a discount to face value, thereby increasing the overall yield it was to get on the loan.

The move was termed as “typical junk bond investing” -- a strategy to invest in debt of risky companies at a high yield -- by analysts.

Market watchers even called the move “stupid”, SREI CMD Hemant Kanoria admitted in a recent interview, but what most analysts had missed is the fact the fund had secured prime collateral in the form of shares of Vijay Mallya’s crown jewel, United Spirits Ltd , of an amount equal to the loan granted.

As a result, it got about 49 lakh shares in USL at the then prevailing price of about Rs 850 per share.

The terms of the loan stipulated that if Kingfisher defaulted on its payment, the SREI fund was free to sell the USL shares in the market.

But soon enough, shares in USL went up in a almost a straight line to about Rs 2,900 currently, buoyed by an interest in top spirits maker Diageo, which had gone on a stake-buying spree in the firm.

Which meant that, ironically for a lender, the VC fund must have been praying for Kingfisher to default on its debt, which would have enabled it to sell the USL shares it held as collateral whenever it wants to.

Now that Kingfisher appears to have defaulted on its debt, the fund interestingly still does not appear to be in the mood for selling its collateral, despite an open offer by Diageo at a price of Rs 3,100.

“The trustees [of the fund] in their wisdom have decided to hold on and the prices have increased,” Kanoria told CNBC-TV18 on Thursday .

At a price of Rs 3,100, the amount of USL shares the fund owns works out to over Rs 1,500 crore.

Out of Rs 430 crore, SREI Infra had invested about 45-50 percent of its own money in the loan, he said.

But regardless of whether the fund intends to sell the USL stake it owns anytime soon or not, its so-called “risky” investment has already hit the bulls eye.


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