Oyo's efforts to raise $600 million via debt to help its listing plan

Hospitality firm Oyo's latest efforts to raise $600 million via debt, which Moody’s rated as B3 corportae family rating (CFR), will, many believe, aid the company's future plans of listing.

Oyo’s  term loan B (TLB) is a way for it to get close to institutional investors before its initial public offering (IPO), similar to other firms like Grab that raised debt similarly, said people in the know.

The company said $600 million in a TLB structure will service its existing loans, which are on higher interest rates.

News reports on Thursday said SoftBank-backed Oyo was looking to raise $600 million (over Rs 4,380 crore) in debt from US institutional investors to service its existing loans.

The company had previously said it would  go for an IPO, but no timeline given yet. In December, Founder and Group Chief Executive Officer Ritesh Aggarwal said the hotel chain has $1 billion cash until its IPO, and has also said it plans to focus on its five core markets - India, Southeast Asia, Northern Europe, China, and the US - and not expand to new markets in the aftermath of the Covid-19 pandemic.

Earlier in March this year, Agarwal had told employees in an email that the company's India business is earnings before interest, tax, depreciation, and amortisation-positive in the January-March quarter, and is earning the same gross profits globally in dollars since January 2021 as it did in the pre-Covid period, said media reports.

Moody's Investors Service on Thursday assigned a first-time B3 CFR to Oravel Stays, popularly called Oyo.

Moody’s CFRs are opinions of a corporate family’s ability to honour all of its financial obligations.

The bond credit rating firm also assigned a B3 rating to the senior secured term loan to be issued by Oravel Stays Singapore, Oyo's wholly owned subsidiary. The proposed loan will be guaranteed by Oyo and many of its units.

In February, Southeast Asian ride-hailing and food delivery giant Grab said it raised $2 billion from its first term loan for general corporate purposes and will allow Grab to diversify its finances. Grab is also a SoftBank investee company.

"Companies looking at IPO often raise funds to get close to institutional investors," said an industry executive, adding, “Besides with interest rates down, it makes sense to raise money now and repay old debts on higher interest rates.”

The current loan is open to institutional investors, making Oyo the first Indian unicorn to seek debt from foreign institutional investors, said Salman Waris, partner-head, TMT and IP Practice at Delhi-based TechLegis Advocates & Solicitors.

"TLBs typically mature within six to seven years and have a small repayment schedule during the term of the loan, with the remainder due on the maturity date. It is an effort by the company to restructure its existing debt, so as to ride the pandemic which has hit the tourism industry hard and also as a stopgap arrangement till the company goes to IPO, which can now only happen in post pandemic scenario once the tourism sector picks up again," added Waris.

Moody's said in its note that it expects Oyo to continue incurring losses over the next two-three years and that its path to profitability remains uncertain in light of travel restrictions due to the pandemic. However, it was optimistic about its long-term prospects.

The firm's rating also incorporates Oyo's aggressive financial policy, as demonstrated by the use of debt to fund its evolving business, Moody's said.

Even though Oyo, funded by SoftBank, among others, has a history of pursuing aggressive expansion and business policies that have led to significant losses, its shareholders have provided substantial equity capital to cover its cash burn, added Moody's. One such bet was what Agarwal did in 2019. Through RA Hospitality Holdings (Cayman), Agarwal signed a $2-billion primary and secondary management investment deal, supported by global institutional banks and his financial partners. He bought shares from early investors Lightspeed Venture Partners and Sequoia India as well.