Oyo's loan prepayment: Moody's nearly doubles the EBITDA estimates

Global credit rating agencies Fitch and Moody’s have termed Oravel Stays’ – the parent company of Oyo – move to repurchase $195 million of its outstanding debt as positive.

Fitch said that the move will improve Oyo’s EBITDA and that they may take positive rating action, while Moody’s expects Oyo to generate an adjusted EBITDA of around $90-$100 million for FY 2024, nearly doubling the EBITDA estimate from $50-55 million projected earlier this year (May 2023).

Oyo recently initiated part prepayment of its debt through a buyback process. The company will repurchase approximately $195 million – around 30 per cent – of its outstanding Term Loan B (TLB) of $645 million due in May 2026, using internal cash.

“We believe that the potential transaction along with sustained EBITDA growth could improve Oyo’s EBITDA leverage to below 5.0x, the threshold below which we may take a positive rating action,” Fitch said.

Under the existing term loan facility, Oyo is required to maintain $100 million in cash if its EBITDA is below $50 million and $50 million in cash if EBITDA improves to above $50 million. The company is seeking lenders’ consent to remove the covenant so it can use the freed-up cash to buy back $195 million of its loan. Simultaneously, the company aims to amend liquidity covenants to include a $25 million revolving credit facility (RCF), mandating only $25 million in cash.

Fitch added that, should the proposed transaction materialize, Oyo's cash and equivalents could decrease to around $80 million from approximately $280 million in September 2023. “We believe cash will then increase to $100-120 million by end-March 2024 (FY 2024), as we expect the company to generate positive free cash flow of $20-$40 million in 2HFY 2024. We believe that such a cash balance provides adequate buffers to meet business needs at Oyo’s current scale and profitability levels.”

Moody's, who also views the transaction as credit positive, said that the utilization of cash to buy back the loans reflects management's commitment to its existing business strategy as well as its confidence that the business will generate positive free cash flows on a sustained basis going forward.

"Notwithstanding the reduction in Oyo's liquidity buffer, we still view the transaction as credit positive because it will result in annual interest savings of around $27 million and also improve the company's credit metrics,” Moody’s said.

For the six months ending 30 September 2023, Oyo demonstrated a significant improvement in adjusted EBITDA, generating around $50 million (net of ESOP costs) compared to an EBITDA loss of $31 million during the same period in 2022. “We expect that the company will generate adjusted EBITDA of around $90-$100 million for the fiscal year ending 31 March 2024,” added Moody’s.

The IPO-bound hospitality major is expected to report its first-ever profit in the second quarter of the financial year 2023-24, with a profit after tax (PAT) of Rs 16 crore, the company’s chief executive officer (CEO) Ritesh Agarwal recently revealed in an email to Oyo’s top management. The company, Agarwal said, achieved operational profitability in FY 2023, clocking an Adjusted EBITDA of approximately Rs 277 crore.

Assuming Oyo repurchases $195 million of its outstanding loans, its total adjusted debt will be reduced to around $450 million, implying a debt/EBITDA ratio of 5.0x for FY 2024. However, Moody's notes that any rating upgrade is unlikely at this point due to Oyo's short track record of positive EBITDA.

Moody’s further added, “In the absence of any significant working capital and capital spending requirements or near-term debt maturities, the cash on its balance sheet, along with the internal cash flow from operations, will be sufficient to meet the company's cash requirements over the next 12-18 months.”