Corporate Debt Restructuring :Restructured loans of banks may zoom by ₹1 lakh cr in next 5 months

B L :MUMBAI, NOV 4:2014

Debt of top 500 corporates totals ₹28 lakh cr; 1 in 5 firms distressed: India Ratings report

  

The Indian banking system could see restructured loans surging by ₹1 lakh crore in the remaining five months of this financial year even as it may take a ‘big bath’ to address asset quality problems and start the next fiscal year on a clean slate, said credit rating agency India Ratings (Ind-Ra).

Painting this grim scenario, the agency said loan accounts whose performance may deteriorate could be addressed (restructured) at one go.

Restructuring of assets entails creditors (among others) extending concessions to borrowers by reducing interest rates, rescheduling repayments and converting debt into equity, and promoters infusing equity into their venture.

Ind-Ra based its estimates of restructured assets on an analysis of the credit metrics of the top 500 corporate borrowers, who accounted for the largest debt in the financial year that ended in March 2014.

The aggregate debt of these 500 corporates is ₹28,76,000 crore, which is 73 per cent of the total bank lending to the industry, services and export sectors.

Financially distressed

Around 82 of these 500 top borrowers have already been formally tagged as financially distressed (as a non-performing asset, corporate debt restructuring case or restructured asset).

Another 83 (17 per cent) of these 500 borrowers, accounting for 9 per cent of the overall debt of the group, have severely stretched credit metrics, said Ind-Ra. The credit rating agency observed that within these 83 corporates, operating profitability barely covers the interest required to be serviced in most cases. These corporates have limited expectation of an immediate improvement in profitability.

However, thus far, these borrowers with severely weak credit metrics have not been publicly tagged as financially distressed. But one out of every four could be tagged as stressed by the end of March 2015.

Incremental restructuring

Ind-Ra assessed that potentially one-third to half of the 83 accounts could be in the category of SMA 2 (special mention accounts), with delays in debt servicing ranging between 61 and 90 days.

Loan accounts, which may be tagged as SMA 2 during the October-December 2014 period, would be either normalised or put up for restructuring. This decision is to be arrived by the lenders by March 31 next year, it added.

If some of the corporates are unable to generate significant cash flow or infuse significant equity in the near term, they may be identified by their lenders for restructuring pursuant to RBI guidelines.

Some borrowers may even deteriorate further, to be tagged as NPAs. The cumulative impact may be an incremental ₹60,000 crore to ₹1 lakh crore of restructured assets in the banking system in the next five months, the report said.

A senior public sector bank official said given the tough situation in the economy, whereby infrastructure projects are stalled because of external factors and de-allocation of coal blocks will impact metal, power and cement companies, the central bank needs to come up with a special dispensation for asset classification.

“If the RBI sticks to its deadline of April 1, 2015, for complete withdrawal of regulatory forbearance, then banks will get impacted as not only will an asset be downgraded once it is restructured, they will also have to make higher provisions. This will shake investor confidence in banks,” he said.

VS Seshagiri Rao, Joint MD and CFO, JSW Steel, said banks have to take a practical call and come out with a special sector-specific dispensation on stressed assets.

Each sector, such as infrastructure, power, steel and textiles, is affected by different problems, largely due to factors beyond the purview of company promoters.

For instance, delays in project clearance and high pricing of raw material in domestic markets, especially coal, is eroding profitability of Indian companies.

Banks face Rs 1 lakh cr loan restructure hurdle: Modi govt must privatise state lenders

Dinesh Unnikrinan : FP : Nov 5,2014

The rating downgrade effected by Standard and Poor’s on state-run lender, Indian Overseas Bank (IoB) is yet another strong warning to the Modi government about what is possibly in store in the ensuing years — worsening financial position and a bigger crises in government banks.

S&P downgraded the long-term credit rating of IoB to BB+ speculative grading in the face of recent deterioration in the bank's asset quality. IoB’s gross non-performing assets (NPAs) shot up to 7 percent in the September quarter from 5 percent in the March quarter.

Besides, the chunk of total standard restructured loans on the books of the bank too has surged to close to 8 percent in the quarter, which means a significant chunk of the assets in IoB’s is now under the stressed asset category.

According to officials at the agency, IDBI Bank is the only lender it rates that carry a BB+ rating.

Typically, long-term instruments of state-run banks are accorded rating at par with the sovereign rating given that these entities enjoy the backing of the sovereign. In rating parlance, BB+ is speculative or junk grade.

For practical reasons, a junk rating would mean a sharp rise in the borrowing costs of the firm concerned and risk aversion from the investors, besides being an indicator of trouble in the balance sheet. Kolkata-based United Bank of India, which had seen its gross NPAs surging to double digits early this year, is not covered by S&P.

At least five state-run banks have their gross bad loan levels above 5 percent of their total loans now. Some of them are facing immense stress on account of an equal rise in the restructured loan portfolios as well. Restructured loans are loans of troubled borrowers, which seek relaxed repayment terms from banks.

Currently, about Rs 2.5 trillion of the loans given by banks are bad and about Rs 5-6 trillion are being recast under various channels.

The situation is unlikely to get better any time soon. On Tuesday, rating agency, India Ratings, formerly known as Fitch India, said India's banking system is likely to witness a surge in restructured assets by a whopping Rs 60,000 to Rs 1,00,000 crore over the next five months.

"We expect the restructured assets in the banking system to shoot up by another Rs 60,000 crore to Rs 1 trillion over the next five months," India Ratings senior finance director Deep N Mukherjee said.

Such a rise in the bad and restructured loans could significantly add up to the capital burden of banks since current norms require banks to set aside substantial amount of money to cover stressed assets.

Capital burden arising out of bad loans is just one side of the story. State-run banks also require about Rs 2.5 trillion capital to meet the Basel-III capital norms.

Any respite in the stressed asset situation can happen with a lag—that too if economic revival takes strong hold, projects come back on track as and when investments return to the country and procedural roadblocks are removed. Until then, stress in the banking system is a hard reality before the Modi-government to deal with.

The financial burden will ultimately fall upon the government, which is the owner of state-run banks. The government infuses capital into state-run banks on an annual basis.

For the current fiscal, the budgeted allocation is Rs 11,200 crore. That would be just a fraction of what is actually required considering the growing capital requirement, even with a longer deadline to comply with Basel-III rules.

Going ahead, a capital constrained government will find it extremely difficult to continuously feed state-run banks with taxpayer’s money. The solution, as FirstBiz has highlighted before, is in privatizing public-sector banks and leaving the competition to the market. The government has no business to be in business.

Modi, who has positioned himself as the agent of change, shouldn’t shy away from uttering the P-word any more. The process could begin with small and medium sized banks that are financially weak.

 

Corporate Debt Restructuring :Banks step up restructuring of stressed assets

 Anup Roy |  Vishwanath Nair mint  27 Oct 2014

Fourteen cases worth Rs.13,300 cr were referred to
corporate debt restructuring cell in the September 
quarter against two cases worth Rs.2,854 cr in Q1

Mumbai: Indian banks have only two quarters left to restructure stressed assets without significantly dragging down their profits—a fact that’s prompting banks to step up the recast of loans that may eventually need restructuring.

Effective 1 April 2015, the Reserve Bank of India’s regulatory forbearance, under which banks were allowed to qualify restructured assets as standard, will come to an end.

For now banks are setting aside 5% of the value of the loan to cover the risk of default on any restructured assets. Starting in the next financial year, when all restructured assets will be termed as non performing assets (NPAs), or bad loans, the requirement will increase to a minimum 15%.

The change will also mean banks’ bad-loan portfolio will swell.

In fact, fearing an increase in bad assets once change takes effect, bankers have already started asking RBI to extend the forbearance for another year, the Business Standard reported on 15 October. The bankers, according to the report, have told RBI that if the window is not extended, their gross NPA ratio will rise to 10% from 4% in March 2014.

Bad loans in the banking system rose to 4.03% of total advances in 2013-14 from 3.42% in 2012-13 and 2.94% in 2011-12, finance minister Arun Jaitleytold the Parliament on 1 August, as slower economic growth and delays in securing statutory approvals such as environmental clearances and completing land acquisition stalled many big-ticket projects, hurting companies’ ability to generate cash flows and repay loans on time. The economy grew less than 5% in each of the previous two years.

To fend off some of the negative impact of higher NPAs and increased provisioning that will be required from next year, banks appear to be hastening restructuring.

“Restructuring is not a bad thing. The economy is not out of the woods and a lot of companies are under stress,” said a senior public sector banker who didn’t want to be named.

Restructuring through so-called joint lenders’ forum or the corporate debt restructuring (CDR) mechanisms will “continue to happen, but we won’t get the regulatory leeway if we restructure after six months”, the banker said.

“So for a few cases, where we know for sure restructuring will be required in the coming quarters, we are fast-tracking the process to save precious capital. There is nothing wrong in it,” he added.

This increased pace of restructuring is showing up in data from the CDR cell. In the three months ended 30 June, referrals to the CDR cell fell to only two cases, amounting to Rs.2,854 crore, according to data on the CDR cell website.

In the three months ended 30 September, 14 cases, totalling Rs.13,300 crore, were referred to the cell. Of the referrals, seven cases involving a combinedRs.6,000 crore of loans came in September alone. Among these was Shriram EPC Ltd’s Rs.2,400 crore loan. On 11 September, Shriram EPC informed the BSE that its board had approved a scheme of restructuring.

To be sure, the fall in debt restructuring cases in the first quarter was also partly due to a new stressed asset framework under which banks were required to form a JLF to monitor accounts of Rs.100 crore and above that are overdue by more than 60 days.

The JLF can together choose to give additional funds to a stressed borrower, or restructure, or initiate recovery if they feel their loan is under threat.

The new rules were effective 1 April.

“It took a full quarter for banks to understand how the JLF should function. Companies also requested us not to put them in CDR because that puts lot of restriction on them, hence the low referrals in the first quarter,” said another senior public sector banker who did not want to be named.

Once a company is in CDR, its operating freedom is curtailed as banks keep a close eye on the activities of the management and sometimes push the companies to sell assets to recover their dues. The companies also find it difficult to raise additional funds from the market.

“Besides, companies were hoping that with a stable government at the centre, the macro-economic situation will improve fast, but nothing much came in the July budget and then the recent coal de-allocation has dashed hopes of companies for a quick turnaround. Referrals in the second quarter is now back to normal,” said the banker quoted above.

However, bankers add that restructuring in the current fiscal is unlikely to rise above the levels seen in previous years. Rating agency Crisil Ltd estimates that restructuring in fiscal years 2012, 2013 and 2014 were to the tune ofRs.1.2 trillion, Rs.1.6 trillion and Rs.1.3 trillion, respectively.

Crisil expects the banking system to restructure Rs.1 trillion of loans in fiscal 2015, out of which Rs.30,000 crore was completed in the first quarter.

“The key reason is the existing pipeline of assets under restructuring, end of regulatory forbearance for restructured assets by March 2015, and continued pressure on the credit profile of leveraged companies. This will take the cumulative restructuring since April 2011 to nearly Rs.5 lakh crore by March 2015,” said Pawan Agrawal, senior director at Crisil Ratings.

Restructuring in fiscal 2016, the year when the regulatory forbearance ends, depends on a few key factors, explained Agrawal.

Apart from economic growth and the ability of firms to raise equity through sale of assets or otherwise, “success of the RBI norms related to revitalization of distressed assets, the effectiveness of JLFs and success of the policy measures (such as fuel availability, fuel pricing, and ease of land acquisition process) to address the viability of the infrastructure projects”, will be key in determining restructuring in the next financial year, he said.

An emerging uncertainty which could add to the need for restructuring is the recent de-allocation of coal blocks following a Supreme Court order.

Bankers fear this will add to stress across power sector borrrowers, many of whom have already faced adverse operating circumstances due to issues such as inadequate fuel linkages. Loans to companies affected by the coal-block de-allocation may need restructuring, bankers say.

In a high-level meeting on 17 October between the finance ministry, power ministry, and bankers, power companies requested for special dispensation for their loans. The request is likely to be put across by bankers to RBI.

A special dispensation is restructuring outside the regular banking mechanisms such as CDR where accounts across an industry can be restructured without additional provision requirements. Typically, under such schemes, companies get a temporary moratorium and more time to repay loans and a change in interest rate terms.

“These are special extraordinary conditions and merit a dispensation by the central bank. If RBI allows us such a provision, then the stress on our books can come down significantly,” said a banker who attended the 17 October meeting. He also spoke on condition of anonymity.

Banks’ exposure to the power sector is more than Rs.5 trillion, banking secretary G.S. Sandhu said after the meeting. An 8 October report by India Ratings and Research Pvt. Ltd said the committed exposure of the banking sector to power projects affected by the Supreme Court verdict is aroundRs.90,000 crore, or about 1.2% of the banking system’s loans.

Surge in infrastructure firms seeking debt recast

BL :K. RAM KUMAR : 20 SEP 2013

Delays in obtaining statutory approvals and inability to tie up funds are pushing an increasing number of infrastructure companies to restructure debt.

Currently, companies in this segment account for over a tenth of the total debt being recast by the banking industry through the corporate debt restructuring (CDR) route.

As of June 2013, these companies, mostly engineering, procurement and construction (EPC) contractors executing road, bridges and irrigation projects, accounted for Rs 34,676 crore or nearly 14 per cent of the Rs 2.50-lakh crore total debt being recast by the cell.

As of March 2013, such projects accounted for 9.57 per cent of the total debt of Rs 2.29-lakh crore.

Among EPC contractors, Gammon India’s debt exposure of about Rs 13,000 crore has been approved by lenders for restructuring under the CDR cell.

Lanco Infratech’s Rs 7,500-crore debt exposure too has been referred to the cell, it is learnt.

The iron and steel segment continues to top the list of sectors seeking a debt rejig, accounting for 21.41 per cent of the total debt as of June 2013.

Infrastructure figures next on the list. Problems associated with land acquisition and forest/environment clearances, among others, are hindering the implementation of infrastructure projects, and delaying servicing of loans.

Policy, funding issues

Bankers attribute the infrastructure sector problems partly to policy hiccups, which are not in the control of promoters, and partly to funding problems.

“Many groups took up a number of projects in the hope that as and when some of them come on stream, they will be able to either sell those projects or securitise the receivables and get funds,” says a top public sector banker.

“The groups were also hoping to get funds from the private equity space or from the market. Once this materialised, they planned to get the funds into the main holding company and take up new projects.”

However, these projects did not start on time, resulting in the promoters not being able to sell their projects or securitise their receivables.

Due to policy bottlenecks, private equity players shied away from investing in the projects. And, the promoters could not tap the equity market as it was not conducive for fund raising.

So, the infrastructure project holding companies kept taking on more debt, resulting in their debt-equity ratio becoming skewed.

For many firms, the ratio has gone up and this is not sustainable, said another banker.

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Infra firms now account for close to 14% of the total debt being referred to the CDR cell.

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(This article was published in the Business Line print edition dated September 20, 2013)

Lenders approve debt recast plan of Suzlon

The Hindu :MUMBAI, January 25, 2013 

In a major respite for debt-laden wind energy firm Suzlon Energy, its lenders have approved a corporate debt restructuring (CDR) plan for Rs.9,500 crore, providing a new lease of life for the Pune-based company.

The package includes a two-year moratorium on principal and term-debt interest payments; a three per cent reduction in interest rates; and six months moratorium on working capital interest.

As part of the package, Rs.1,500 crore, which is two years interest payment during moratorium, will be converted into equity or equity-linked instrument over the next two years to bring stronger financial stability.

REPAYMENT PLAN

Suzlon has also got a 10-year repayment plan. The lenders have also agreed to provide enhanced working capital facility to the tune of Rs.1,800 crore, which will allow the troubled wind turbine maker to accelerate the execution of the order book.

The promoters have been asked to bring in equity to the tune of Rs.250 crore into the company within a stipulated time-frame.

Out of this, Rs.62 crore has already been infused, the company said.

The approved CDR is effective from October 1, 2012.

“This approval clearly underscores the fundamental viability of our business. This is a major step forward in our efforts to achieve sustainable capital structure,” said Kirti Vagadia, Chief Financial Officer, Suzlon Group.

“The terms of the package….are key enablers towards normalising our business. I am confident that by this CDR package, we will quickly return to position of stability and confidence for our customers, vendors and employees,” Mr Vagadia added.

“Additionally, we will continue to be in constructive dialogue with majority of our bond holders across all the four series, and this development will help provide further visibility towards finding a consensual solution at the earliest,” he added.

$200 MILLION DEFAULT

In October last, the company had defaulted a $200 million (about Rs.1,100 crore) convertible bond redemption due to severe liquidity problem eroding its credibility among investors. Suzlon is the world’s fifth largest wind turbine maker. Suzlon Group said that its long-term strategic plan for realising synergies from its REpower remains unchanged.

Economic malaise in India and corporate debt restructuring

Moneylife :NAGESH KINI | 08/08/2012 02:32 PM |   

The need of the hour is arriving at just and equitable solutions for the revival of viable borrowers when both the lenders and borrowers share losses in equal measure and not resort to one-upmanship

The present condition of sky-rocketing food prices driven hyperinflation goes way back to 2006 through 2008 following rapid-fire economic cycles of boom, recession and stimulus-driven revival bringing it now to sheer stagflation accentuated by total policy paralysis, utterly bad governance coupled with trust deficit at the national level.To blame the slowdown in the West and coalition compulsions at home is absolutely fallacious and ridiculous. The United Progressive Alliance’s (UPA) flawed policies are the root cause for the current malaise.

The so-called heady boom of that period gave a kick-start to the demand for risk equity capital when investment and merchant bankers had field day raising initial public offering follow-up on public offers, qualified institutional placements, private equity investments and foreign institutional investors that flooded eastwards from the Western financial markets consequent upon the Western meltdown. Our markets were deluged with funds of all hues and colours, legitimate and illegitimate irrespective of enterprise valuations (EVs) which invariably appeared many a times astronomical!

 Following the post-Lehman crisis, beginning 2009 the markets lost their euphoria and sheen. Raising equity at high EVs became difficult and capital-intensive industries in engineering, procurement, reality, infrastructure and power had to go in for large-scale debt-funding via term borrowings from commercial banks and developmental finance institutions, increasingly present NBFCs and also external commercial borrowings.

The Reserve Bank of India (RBI), concerned with high inflation resorted to raising the key repo and reverse repo rates a record 13 times since March 2010 only to slow down now! This made debt servicing for the industries more expensive. Suffocated with high interest rates, defaults in interest and installments began to become the order of the day. The heady boom having come to an abrupt end, the focus has now shifted to numbers of bad loans or distressed assets as they are termed in the West.

This brought in an era of corporate debt restructuring (CDR), now denoted Greening of loans (!) It seeks to recognize impairment by allowing the reorganization of outstanding debt obligations by bringing about reductions in the burden of the mounting/compounding debts—lessening in the interest rates and rescheduling the installments by extending the term of repayment. This enables increase in the ability of the borrower to meet debt obligations by letting the lender waive in part or forgive or convert a part of debt into equity.

To prevent abuse by delinquent borrowers, the RBI-appointed Mahapatra Committee in its fairly comprehensive report, quoting best practices across the globe, has rightly stipulated that the CDR request be approved by at least 75% of total exposure and consent of 60% of the total creditors. As per the recommendations the promoter-directors are mandatorily required to infuse 15% of their own additional equity upfront to enhance their personal stake in the restructuring exercise. To revive the entities it is absolutely imperative that both the lenders and borrowers sacrifice in equal measure. The promoter-directors cannot be allowed to walk away in gay abandon with the cream of past malpractices when the lenders have to bear the brunt of write-off burden. This avenue has been unfairly exploited by a private airline to get its massive debt converted into equity at inflated valuations by at least half a dozen large commercial banks! So much for implementing and enforcing the rule of the law by the banking and market regulators!

According to the CDR Cell, during fiscal 2012 banks have restructured Rs 64,500 crore—an increase of 156% over the previous year— when the banks filed 84 cases.  This makes restructuring the highest since its launch in 2001. It has helped revive the macro-economic conditions for both the banks by promptly recognizing and providing for the impairment of their non-performing assets well in time. The borrowers are also able to reduce their interest and principal debt burdens by providing for sufficient breathing space to genuinely viable units to enable them to bring about a turnaround without having to resort to tedious DRT and court procedures or end in winding up proceedings.

The Hindu Business Line in a front page report said: “Wockhardt ready to exit debt recast process”. It reports that the company had first sought the CDR lifeline through ICICI Bank in 2009 when it defaulted on the $110 million FCCB (foreign currency convertible bond) that made worst its outstanding debts of Rs3,400 crore and Rs1,300cr under CDR.  According to chairman Habil Khorakiwala all loans had been restructured and it would settle with the banks that do not want to continue with the CDR process. The company had to close a Rs1,600 crore deal to sell its nutrition business to Danone to repay the debs due. It had already exited its non-core businesses as part of regaining financial health.

The Apparel Export Promotion Council (AEPC) has sought the finance minister’s help in restructuring loans —out of total outstanding debts of the textile sector of Rs1,55,809 crore, debts of Rs35,000 crore needed restructuring. Its chairman has requested the RBI (Reserve Bank of India) and the Department of Financial Services to give directions for the restructuring move.                        

The CDR route for debt mitigation has also been found to be unfairly exploited by Kingfisher, a private airline, by getting a part of its massive debt to banks converted into equity at inflated valuations. So much for implementing and enforcing the rule of the law by the banking and market regulators!

The need of the hour is arriving at just and equitable  solutions for the revival of viable borrowers when both the lenders and borrowers share losses in equal measure and not resort to one-upmanship—the borrower enjoying on misused/misapplied bank funds on the one hand and on the other, a vindictive lending bank seeking to squeeze the hapless borrower, more often than not small traders, SMEs, householders, vehicle loan or even a delinquent credit card defaulters who may have valid reasons and only seek additional time and concessions. There is no reason why the concessions are not extended to these small time borrowers where banks resort to extortionist recovery and attachment proceedings while dealing with big ticket chronic delinquent defaulters with Kid gloves by bending backwards with concessions.

Rightly put by a veteran banker—when a small man owes a few thousands to a bank, he is in deep trouble but when a big tycoon has outstandings running into crores with the bank, it is the bank that faces the music! 

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)