Why two NBFCs are requesting easing of bond covenants

Mint

27-05-2025

Two non-bank financiers lending to small businesses have separately approached their bondholders, seeking relaxations on covenants that were part of their original agreements to raise funds.
Ugro Capital and Aye Finance raised bonds worth ₹49.28 crore and ₹50 crore, in 2022 and 2024, respectively. The lenders have now requested bondholders to waive certain covenants, and the respective bond trustees have conveyed them to the investors. In finance, covenants are part of agreements that prescribe certain dos and don'ts for issuers of these debt securities. A breach allows bondholders to seek additional interest, among other things.
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While Ugro Capital has breached its covenant around maintenance of capital to risk weighted assets ratio (CRAR) or capital adequacy ratio, Aye Finance believes it could breach the ceiling on stressed assets. Mint has seen a screenshot of the email detailing Ugro's request, and the text of the email sent on Aye Finance's request. Ugro has assets under management of ₹12,003 core as on 31 March, whereas Aye Finance has assets of ₹4,975 crore as on 30 September (latest available).
IDBI Trusteeship Services informed holders of Ugro's bonds maturing in September 2025 that the lender has breached the covenant that it has to maintain a capital adequacy of 20%. In the March quarter, that dropped to 19.41%.
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'Request of the company for relaxation of the covenant is presently under process," it wrote to bondholders in an email titled 'Notice for breach of covenants and intimation of the meeting of debenture holders.
Ugro informed IDBI Trusteeship on 8 May that Reserve Bank of India (RBI) mandates non-bank lenders to maintain a capital adequacy of at least 15% and the company's capital levels were higher, at 19.41%. 'However, it is just marginally below the contractually agreed CRAR of 20%. As such, CRAR of 19.41% demonstrates a sound capital base and financial health of the company," it said in a statement available on the website of IDBI Trusteeship.
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'We would like to state that in September 2022 when (the) debentures…were issued, the company was in its growth phase and it had agreed to high CRAR of 20%. You are requested to note that for most of the subsequent public as well as private NCD issuances of the company, the company has agreed to a covenant to maintain CRAR of 15% only i.e. minimum CRAR stipulated by RBI," it said.
A spokesperson for the lender said in an emailed statement that the company has total borrowing of ₹6,900 crore as of 31 March.
'The bonds referred (to) by you are old bonds with small outstanding of ₹49.28 crore, as per the terms of trust deed, Ugro has requested for the capital adequacy covenant to be relaxed for which the trustee has written to bondholders," the spokesperson said.
On 20 May, Ugro said it will raise up to ₹1,315 crore, in a mix of preferential issue of shares and a rights issue. The spokesperson said the proposed capital injection would increase its capital adequacy from 19.4% at present to 29.4%.
Meanwhile, Aye Finance—backed by Elevation Capital and Capital G—has preemptively asked for a relaxation. In December, it filed its draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (Sebi) to raise ₹1,450 crore in an initial public offering (IPO).
As per the bond agreement, Aye Finance is supposed to contain its gross bad loans and write-offs during the past 12 months as a percentage of its total loan book at 8%. According to an email by Catalyst Trusteeship Ltd to bondholders on 15 April, Aye Finance believes that while the ratio mentioned above stands at 6.82% in December, it could exceed the 8% cap in the coming quarter. This is on account of 'increase in write-offs resulting from overall economic/business cycle".
"In December 2024, we had proactively advised Catalyst's trusteeship on appx (approximately) 4% of our borrowings through NCDs under their trusteeship, of possibly exceeding the covenanted delinquency ratio," Krishan Gopal, chief financial officer, Aye Finance said in response to an emailed query.
'This reflects our commitment to protect the investments of our bondholders irrespective of the amount invested. Such events are not uncommon in the financial industry," said Gopal, adding that the lender has had no recall of any loan or borrowing on account of breach of covenant, and the company continues to maintain good liquidity positions.
He said the company is witnessing a reduction in business stress, and expects normal business conditions as it progresses through this year.
Experts said that stress in certain asset classes was leading to covenant breaches among bond issuers.
'Over the past couple of quarters, due to stress in certain asset classes like microfinance, MSME finance, we have seen covenants getting breached for a few issuers, especially those with respect to asset quality," said Anshul Gupta, co-founder of online bond platform Wint Wealth.
However, Gupta said that a covenant breach does not necessarily mean that an entity is under significant stress or default is imminent, and investors should assess how significant the breach is and what is the impact on the entity's repayment capabilities.
'If the entity's repayment capabilities aren't impacted, generally, waivers are given. Trustees acting on majority investor directions can either waive or enforce the covenants," said Gupta.