Agarwal doesn’t need all bankers. He only needs one

It bears a coupon or interest rate that needs to be serviced. This interest rate is pegged at a level that reflects the “risk” of the loan. Risk is a function of the ability of the borrower to reliably pay back the money (in the case of a company, this would be evidenced by its free cash flow and growth) and the “liquidity” of the asset or collateral (for instance, if shares are being pledged, is there a market for these shares, can it be sold to others should the situation arise and if so, at what value).

Prevention against the action

Finally, lenders look at the influence or power wielded by the borrower over the company whose shares are being bought/lent against. What a lender wants to ensure is that the borrower has enough leverage and power to prevent the company from taking any major action that might destabilize it or risk repayments.

For instance, say a lender gives $200 million to a founder to buy back shares, but then the company itself borrows $1 billion for some reason or goes on an acquisition spree. Then that calls into question the value of the $200 million as well. So they want to ensure that borrowers have the adequate influence to prevent such things.

So how do these facets play out specifically for this deal?

Given that Agarwal has no source of wealth outside OYO, it comes as no surprise that he is pledging the very same shares he is buying as collateral.

But what are these shares worth?

One could say that OYO is, in any case, worth billions of dollars. After all, it is one of the highest-valued startups in India. The problem, of course, is that OYO’s valuation has little to do with its value. Valuation is a function of the funding it has attracted. The billions of dollars of funding it has secured endows it with a multi-billion valuation in the same manner like a tail wagging the dog. Value, on the other hand, is measured by more traditional metrics such as free cash flow and profitability. Given that OYO is far from profitable, that wouldn’t work.

Also, according to investment bankers, The Ken spoke to, the standard LTV adopted when lending for the purchase of liquid and listed shares is 50%. For unlisted companies, you typically halve that. So, 25-30%. This means, that to secure a loan of $2 billion, Agarwal would need to pledge shares worth a minimum of $6 billion.

But the entire company’s valuation was less than this in the last round of funding. Even at the rumored $10 billion valuations of the next round, Agarwal’s entire OYO holding (the sum of the 9% stake he currently holds and the ~20% he plans to buy) would be worth only around $3 billion.

So how do you get past this obstacle?


Enter kayfabe.

Remember that IPO that OYO is claiming to target in the next two or three years? Did you notice anything strange about the $18 billion valuations that are being bandied about? It is a somewhat strange number; not a clean round figure like, say, $20 billion, not even a simple multiple of the $5.7 billion valuations it secured in its last funding round. $18 billion is a vaguely imprecise number. But, by an amazing coincidence, it is exactly how much it would need to be worth if Agarwal’s one-third share in the company would need to be worth $6 billion!

Are they gullible?

But surely bankers are not as gullible as invertebrate journalists who willingly suspend disbelief to faithfully parrot the pie-in-the-sky valuations that OYO’s PR team dishes out?

Maybe not all bankers.

But Agarwal doesn’t need all bankers. He only needs one. One who is clued into the kayfabe and therefore has an informed view on how things will pan out.

If at all Agarwal is able to pull off such a deal, it certainly won’t involve a banker in India. Both because of the size of the deal and because Indian regulations have riders around lending against shares.

So it might be fair to believe that it will be in a place like Singapore. Someone like, say, JP Morgan, which is not only a structured/situational lender but also has a close prior relationship with OYO (the bank was the merchant banker in OYO’s last fundraise).


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