Rolta’s bonds tank on short-seller report

Bonds of the Mumbai-based software developer plunge to record low after Glaucus Research issues report urging investors to sell. Rolta swiftly gave a strong rebuttal.

Rolta India’s dollar-denominated bonds dropped to a record low on Thursday after US short-seller Glaucus Research Group accused the company of fabricating its reported capital expenditures in an effort to mask the fact that it materially overstated its Ebitda.

In a report published on April 16 Glaucus initiated coverage of Rolta’s Delaware-issued corporate bonds expiring in 2018 and 2019 with a “strong sell” recommendation.

Rolta’s chief financial officer Hiranya Ashar told FinanceAsia that: "The report is baseless and that the facts listed are all wrong. It's a motivated move by these guys calling themselves short-sellers and they're doing it to make money."

Ashar added that Glaucus has never contacted Rolta to verify any facts. 

In a press statement released on Thursday afternoon, the Mumbai-based IT firm says it is exploring all avenues, including legal remedies, to protect its interest. 

Headquartered in California, Glaucus has alledged fraud and poor corporate governance at other Asian companies including China Metal Recycling and Ozner Water.

The short-seller's latest bombshell comes roughly less than a year after Rolta sold its second bond in July, the $375 million five-year non-call three note.

The firm also set a price target of $0.16 for the debt with coupons of 10.750% and 8.875% respectively in a recovery scenario. 

As a result of the report, Rolta’s dollar-denominated bonds due in 2019 dropped by an unprecedented 15 points to 84.25 cents on the dollar on Thursday evening, while the company’s shares dropped as much as 14%, according to Bloomberg data.

Backing up its claim that Rolta fabricated financial statements, Glaucus said that from financial year 2008 to 2014 the company spent $1.4 billion on capital expenditures — an amount far in excess of the $858 million in Ebitda it supposedly earned over the period.

Moreover, Rolta’s fixed asset turnover ratio was a dismal 0.7 at times during financial year 2012 to 2014, which is 93% less than an average of its peers, Glaucus added.

“Rolta’s reported capital expenditures are deeply suspicious, with much of the reported spending disappearing into phantom prototypes, mysterious construction projects and computer systems of questionable authenticity and utility,” Glaucus wrote in the report.

“In our view, the preponderance of the evidence suggests that the vast majority of Rolta’s reported capital expenditures have been fabricated," the US firm added.

Contrary to what was said by global rating agencies, which rated Rolta’s junk bonds BB-, Glaucus believes that the Indian company’s business does not generate free cash flow and that it cannot repay foreign bondholders without refinancing.

Moreover, the US short-seller claims Rolta approached foreign bond markets because it was unable to borrow in India.

“Ultimately, we believe that bondholders and ratings agencies have failed to price in evidence that Rolta has materially misstated its financial performance and the risk that Rolta will default on its junk bonds,” wrote Glaucus.

Rolta provides IT solutions to various industries including federal and state governments, defense, utilities and healthcare.

Outstanding bonds

Rolta, which sold India’s first high-yield bond in 2013, had to pay up for its debut $200 million five-year non-call five offering.

It offered investors a 10.875% yield, which was seen as generous for an issuer that was rated BB- by Standard & Poor’s and Fitch.

It certainly did offer a generous pick-up over comparables such as similarly rated US-based IT companies such as Digital Globe’s 2021s which were yielding 4.9% and i-Gate’s 2016s which were yielding 5.672%. Another comparable was China-based provider of water and wastewater treatment Sound Global’s 2017s which were yielding 8.8% at that time.

Despite the generous terms, Rolta still struggled to garner a large size order book. The bond attracted a $400 million order book from 72 investors.

Barclays, Citi, DBS and Deutsche Bank were the joint bookrunners. 

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