FCCB holders move court to shut Zenith

Say the infotech firm is not keen to repay despite holding enough cash company ?open? for negotiation

Lenders of business continuity provider Zenith Infotech have moved the Bombay High Court with a plea to liquidate the city-based company to enable the recovery of Rs 450 crore due to them. Bank of New York Mellon, the trustee of these lenders who hold two tranches of FCCBs (foreign currency convertible bonds), moved a winding-up petition after failing in their earlier efforts to recover the dues.

This is the second instance in recent years after Wockhardt, the FCCB holders moved a winding up petition. The court began hearing the petition last week, and has since adjourned the case to the first week of March after the company sought time. QVT Advisors, which played a leading role in the move against Wockhardt, are the biggest creditors and are at the forefront in this case too. QVT officials, when contacted, declined comment.

Zenith’s troubles began in September last year, when the first tranche of FCCBs it had issued in 2006 came up for repayment. The company had issued bonds worth $33 million at a conversion price of Rs 310. The stock price was well below this level on the maturity date of September 21, 2011, prompting the lenders to demand repayment. But the company cited cash flow issues and did not arrange payment. In an exchange filing, the company said it had defaulted.

MONEY MATTERS

* Zenith's troubles began last September when the first tranche of FCCBs it issued in 2006 came up for repayment

* Bondholders contend the question of negotiation doesn't arise since firm has cash in books to cover loans

* This is 2nd time in recent years after Wockhardt, the FCCB holders moved a winding-up petition

* Hearing the petition began last week; case has been adjourned till first week of March after the company sought time

This failure triggered a cross default provision under which the second tranche of bonds issued in 2007 at a conversion rate of Rs 522 and due to mature in August 2012 is also being considered defaulted. The second tranche, which was for $50 million, has taken the total claims of creditors to Rs 450 crore.

When contacted, company officials confirmed the development. “A winding-up petition has been filed by some bondholders due to a cross-default situation,” a senior official told Business Standard. “We are confident that the court will not give a winding-up order and we should come at a solution through negotiation.”

The company’s officials also derive comfort from the fact that Ernst & Young had recently, on the court’s direction, valued the firm’s cloud/back-up storage business at Rs 598 crore and that it has over 1,000 people on its rolls.

However, bondholders contend the question of negotiation does not arise since the company has enough cash in its books to cover the loans. According to them, Zenith had, on the date of maturity of bonds, cash and current assets worth Rs 150 crore. “Our concern with Zenith is that the company, despite having cash on books, does not want to pay up the bondholders,” a bondholder said. “We have renegotiated in cases where a promoter has a genuine fund issue or needs support. But Zenith is showing no intent to pay up.”

The company had, in December 2010, won shareholders’ approval to sell some of its subsidiaries to facilitate redemption of the above FCCBs. In September 2011, after defaulting FCCBs, Zenith sold its remote infrastructure management business to Summit Partners, a US-based private equity fund, for $55 million (Rs 275 crore). The bondholders allege they were not shared with the full value and structure of the deal with Summit Partners. In addition to the financial consideration, Zenith also got a 15 per cent stake in the SPV that Summit created to acquire the asset. On why did Zenith chose to sell its business, the company official said it was a “strategic” decision. “We did not have enough resources to run two firms,” he maintains. “Since our cloud business was doing well, we thought focusing on it makes sense.”

However, even this money was not used to repay the bondholders. When court directed Zenith to give further details of the transaction and the use of proceeds, the company said it had moved $15 million or Rs 75 crore to related party transactions including in Vu Technologies, owned by Devita Saraf, sister of Akash Saraf and daughter of Zenith founder Raj Saraf.

The bondholders then secured an injunction from the court to stop any further sale of assets by the company. The court has also blocked the company from issuing dividends, according to a bondholder.

On Friday, Zenith shares fell marginally to close at Rs 42.