The failure underscores difficulties of resolving debt issues in an economy that’s only now starting to rebound after two years of sub-5% growth. Photo: Priyanka Parashar/Mint
Bharati Shipyard, SBQ Steels, Electrotherm and Hotel Leela exit CDR cell as resolution of debt proves elusive
Mint :Vishwanath Nair WED, SEP 03 2014. 01 13 AM IST
At least four corporate debt restructuring (CDR) exercises involving a combined Rs.14,000 crore have ended in failure in the first five months of the current financial year, underscoring the difficulties of resolving debt issues in an economy that’s only now starting to rebound after two years of sub-5% growth.
The four companies—Bharati Shipyard Ltd, Hotel Leelaventure Ltd, Electrotherm (India) Ltd and SBQ Steels Ltd—have since exited the CDR cell, a forum of lenders, with a resolution of their debt proving to be elusive, said two bankers associated with the cell.
Creditors have exposure of Rs.5,800 crore to Bharati Shipyard, Rs.4,300 crore to Hotel Leelaventure, Rs.3,000 crore to Electrotherm and Rs.1,000 crore to SBQ Steel, according to data compiled by the cell.
Under CDR, bankers typically extend the loan repayment period, cut lending rates and sometimes agree to forego a part of the money that’s owed to them. Banks may also offer a repayment holiday. A CDR is approved if at least 75% of the banks by value of the loan and 60% by number agree to the proposed loan recast.
In the last fiscal year, at least six large restructuring cases with cumulative loans worth Rs.8,500 crore exited the CDR cell after debt resolution failed. The biggest of them were KS Oils Ltd’s Rs.2,500 crore CDR and Varun Industries Ltd’s Rs.1,600 crore CDR, said one of the two bankers cited above.
A slump in economic growth to decadal lows, high borrowing costs and stalled projects that crimped cash flows have made it difficult for many corporate borrowers to repay debt over the past two years, forcing them to enter CDR agreements with their creditors. The economy has started recovering, growing 5.7% in the quarter to June, the highest in two-and-a-half years.
Banks have preferred to recast loans over classifying them as non-performing assets, which would have required them to set aside more money as provisions, denting their profitability.
The failure of the CDR agreements may imply that creditors had been hasty in agreeing to recast the debt and failed to adequately assess the ability of the borrowers to meet their restructuring commitments, thereby only delaying taking a hit on the loans rather than solving the underlying problems, some experts said.
“Failures in CDR cases happen because at times bankers do not release the funds agreed upon in the restructuring agreement. There may be multiple reasons, like the company’s track record with the bank, fulfilling all the required formalities for the sanction and others. But these funds are crucial for the companies to restart their pending operations,” said the banker mentioned above.
Another reason for CDR failures could be non-compliance by borrowers with the terms of the restructuring agreement. “If promoters do not bring in the required equity, the CDR package cannot be implemented in the prescribed time and the case is declared a failure by the cell,” said a third public sector banker on condition of anonymity.
Emails sent on Monday to Bharati Shipyard, Hotel Leelaventure and Electrotherm, seeking details on the failure of their CDR exercises, remained unanswered at the time of going to press on Tuesday. SBQ Steels could not be reached at its listed email address or phone number.
The CDR cell was overseeing the restructuring of Rs.3.5 trillion in bad loans as of 30 June, according to data available on the cell’s website. Referrals to the cell increased to Rs.4.3 trillion as of 30 June, compared with Rs.2.67 trillion as of 31 December 2012 because of a jump in the amount of stressed assets in the banking system.
Most of these have been admitted, but the success rate of the cell in rehabilitating troubled firms remains under question.
Of the Rs.3.5 trillion worth of loans approved for restructuring by the CDR cell as of 30 June, 130 cases worth Rs.38,686 crore exited because of failure while 75 cases with loans worth Rs.58,205 crore exited after successfully completing the exercise, the cell said on its website.
While the CDR cell does not release company-wise data, Essar Oil, which had received a CDR approval to restructure Rs.9,000 crore of debt in 2005, exited the cell successfully in August 2012, the company had said then in a press release. Similarly, drug maker Wockhardt Ltd exited the CDR cell in 2012 after restructuring debt of more than Rs.3,000 crore over a period of three years.
“It is not fair to compare the failures and successes of the CDR cell, since failures usually happen in the first year or two after the approval, while successes take about six-seven years,” said R.K. Bansal, chairman of the CDR cell.
Bansal added that the reasons for failure of CDR cases range from inadequate contribution by promoters to inability on the part of banks to commit more money.
“Promoters do not bring in their share of the equity, so the implementation of package is delayed, then at times banks also do not approve the promised funds, which causes more problems,” said Bansal.
According to revised guidelines on restructuring of assets announced by the Reserve Bank of India (RBI) on 30 May 2013, promoters’ financial sacrifice and additional funds brought in by them should be equal to a minimum of 20% of the amount sacrificed by banks or 2% of the restructured debt, whichever is higher. The term “bank’s sacrifice” means the amount of “erosion in the fair value of the advance”, RBI said.
RBI also said that these are minimum requirements and that banks are free to charge promoters more as per the risk involved in the restructuring. The guidelines were framed in such a way as to ensure that promoters had more skin in the game.
The consortia of lenders to Bharati Shipyard and Hotel Leelaventure have already sold a majority of their exposure to Edelweiss Asset Reconstruction Co. Ltd and JM Financial Asset Reconstruction Co. Pvt. Ltd, respectively, after they exited the cell. Both companies had received debt restructuring approvals from the CDR cell in the first few months of the fiscal year 2013.
Mint reported on 27 August that the Central Bureau of Investigation had registered a case against the directors of Ahmedabad-based Electrotherm and officials of state-owned Central Bank of India for entering a “criminal conspiracy” to cheat the bank to the tune of Rs.436.74 crore. The case was registered on a complaint filed by Central Bank of India.
“In most of the mid-size cases which are restructured, banks just defer interest and principal repayment for a year or more through a moratorium, while nothing is done to fix problems with these companies,” said Nirmal Gangwal, managing director, Brescon Corporate Advisors Ltd, a firm that specializes in turnaround and restructuring services, explaining the possible reasons behind the unsuccessful CDR cases.
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