The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Shritama Bose

MUMBAI, May 29 (Reuters Breakingviews) - India’s largest-ever private credit deal is a prime example of investors having capital burning a hole in their pockets. Struggling conglomerate Shapoorji Pallonji Group has just sold a 298 billion rupees ($3.5 billion) bond to a group including BlackRock BLK.N, Ares ARES.N and Pimco. Lending to financially challenged companies is where the fast-growing industry cut its teeth. But with around a quarter of assets in private credit providers’ portfolios sitting idle, per BNP Paribas, the hoops all sides are jumping through to get this deal done smacks of desperation.

For starters, it’s a zero-coupon bond, meaning the issuer pays no interest. That’s useful for SP Group. Granted, operating profit at the group's flagship company covers twice its interest bill for the six months to the end of September. That’s a big improvement from four years ago, per rating agency ICRA. But last year, the state-backed Power Finance Corporation declined its borrowing request, and rates on another unit's bonds rose after it missed deadlines for asset sales.

The bondholders make their money – a 19.75% yield – by buying the debt at a discount to face value and holding it until it matures in three years’ time. They don’t seem overly confident the borrower will stay out of trouble, as the terms include not one, not two, but three different layers of protection.

First, SP Group must pay back part of the debt if it sells certain assets. Second, its real estate business is providing a 100% guarantee on the paper. Even that’s not enough. As a third level of defence for its creditors, the issuer has agreed to stump up as collateral 9% of Tata Sons, around half its holdings in the company which owns large stakes in Tata Consultancy Services TCS.NS, Tata Motors TAMO.NS and more.

That pledged chunk could be worth between $8 billion and almost $19 billion, based on research by analysts at wealth manager Spark last year that factors in how much of a discount is applied to the unlisted company’s various public investments.

Trouble is, it’s not certain that Pimco and partners, which also include Farallon Capital Management and Deutsche Bank DBKGn.DE, would be able to get their hands on SP Group’s portion: Tata Trusts, which is Tata Sons’ controlling shareholder, insists the stock is not "freely transferable". Despite their evident trepidation at SP Group's ability to repay them, the bondholders will be hoping they won’t need to put that to the test.

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CONTEXT NEWS

Indian conglomerate Shapoorji Pallonji Group has issued an unrated and unlisted 298 billion rupees ($3.5 billion) three-year zero-coupon bond to companies including BlackRock, Pimco, Davidson Kempner Capital Management, Farallon Capital Management, Ares Management and Deutsche Bank, which also arranged the deal.

The deal offers a yield of 19.75% by being priced at a discount to face value. It is the largest private credit transaction in India, IFR reported on May 16, citing market sources.

(Editing by Antony Currie; Production by Ujjaini Dutta)

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