Hospitality unicorn Oyo’s plan to allocate INR 1,600 crore, approximately $195 million, for debt prepayment using existing cash and free cash flow is anticipated to bolster its Ebitda leverage and interest coverage metrics, as per Fitch Ratings.
On November 13, Oyo, operating under the name Oravel Stays Ltd., presented a buyback proposal of $195 million for its high-cost term loan of around $645 million, roughly equivalent to INR 5,350 crore. This plan involves seeking lenders’ approval to eliminate the covenant that requires maintaining $100 million in cash in a collateral account. Simultaneously, Oyo aims to amend the minimum liquidity covenant by introducing a revolving credit facility of $25 million.
Read More: OYO initiates INR 1,620 Cr debt repurchase, aims to proactively settle one-third of Term Loan B
The company plans to utilize the released funds, along with a portion of its current cash reserves and generated free cash, for a $195 million principal buyback. This move aims to decrease the outstanding term loan to $450 million, equivalent to approximately INR 3,730 crore.
Should the envisaged transaction be completed, Fitch anticipates a 30% reduction in Oyo’s debt and foresees annual interest cost savings of approximately $26 million.
“We believe that the potential transaction, along with sustained Ebitda growth, could improve Oyo’s Ebitda leverage to below five times, the threshold below which we may take positive rating action,” it said in a note on Tuesday.
Following the transaction, Oyo’s cash and equivalents could decline to around $80-90 million before rebounding to $100-120 million by the end of FY24.
“We expect the company to generate positive free cash flow of $20–40 million in the second half of FY24. We believe that such a cash balance provides adequate buffers to meet business needs at Oyo’s current scale and profitability levels,” Fitch said.
In May, the rating agency adjusted the outlook for Oravel from ‘stable’ to ‘positive.’
“The positive outlook continues to reflect that Oyo remains on track to generate positive Ebitda on a sustained basis and deliver significant growth in FY24, benefiting from the demand recovery in the travel and tourism industry and a reduction in its operating costs,” it said.
Fitch anticipates Oyo to achieve an EBITDA of approximately $100 million, equivalent to INR 830 crore, in FY24, whereas the company projects its EBITDA to surpass $110 million.
In August, it was reported that Oyo, set for an IPO, is targeting approximately INR 800 crore in adjusted EBITDA for FY24, based on a presentation by Chief Executive Officer Ritesh Agarwal.