Gammon India’s corporate debt restructuring cleared

Under the agreed CDR terms for Gammon, loan repayment will be stretched to 10 years and the company gets a moratorium of two years. Photo: Priyanka Parashar/ Mint

Live MInt : Didesh Unnikrishnan :Thu, Jul 04 2013. 11 58 PM IST

Loan repayment to be stretched to 10 years, Gammon India to get moratorium of two years on servicing it

Mumbai: Creditors have approved a Rs.13,500 crore corporate debt restructuring (CDR) package for Gammon India Ltd, offering the engineering and construction company a breather from a crisis brought on by slower economic growth and project delays, but adding to the growing pile of restructured loans at banks.

The CDR cell, a forum of lenders, has cleared the proposal and the process of loan restructuring will start soon, said two bankers familiar with the proposal. They declined to be named because of the sensitive nature of the matter.

Under the terms agreed for the CDR, the loan repayment will be stretched to 10 years and Gammon India will get a moratorium of two years on servicing it. The interest rate on the loan amount will be reduced by 1-2 percentage points to 11-12%.

“The loan recast will definitely aid an improvement in the operations of the company. Banks have approved this case, recognizing that there is a genuine need for the firm to avail this facility,” said a banker with a state-run bank, one of the creditors of Gammon India, who also did not want to be named.

Emails sent to officials at Gammon on Wednesday remained unanswered as of press time.

Gammon India and other infrastructure companies are struggling amid a slump in economic growth, which fell to a decade-low of 5% in the year ended March, as companies put new investments on hold. Infrastructure firms have also been battling a credit crunch amid high borrowing costs that made it difficult for many borrowers to repay debt.

Delays in securing mandatory government approvals have stalled project execution and impeded cash flows at several infrastructure firms. In April, according to finance ministry estimates, about 215 infrastructure projects were stalled, involving a collective outlay of over Rs.7 trillion.

Shares of Gammon India surged as much as 9.6% in intra-day trading on investor speculation about the loan recast. They closed up 3.481% at Rs.19.4 on the BSE on a day the benchmark Sensex gained 1.22% to 19,410.84 points.

In Gammon India’s case, out of the total debt amount, banks have a fund-based exposure of aboutRs.3,500 crore Fund exposure is the loan amount given by the bank to the company. Non-fund exposure is mainly in the form of performance guarantees or similar facilities

. Leading lenders to the company include ICICI Bank Ltd and Canara Bank Ltd. Banks will restructure the non-fund exposure of the company to the extent at which the facility has been used, said one of the officials cited above.

The individual exposure of each bank to Gammon India could not be ascertained as the banks declined to divulge details.

As of 31 May, Indian banks had loans outstanding of Rs.7.7 trillion to the infrastructure sector.

Under CDR, bankers typically extend the 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 proposal.

For the quarter ended 31 March, Gammon India reported a net loss of Rs.124.98 crore, largely because of some one-off items on its overseas operations, which included provisions made by the company in connection with investments and advances.

Gammon joins several companies that have recast loans. In the recent past, banks have restructured the loans of companies including Orchid Chemicals and Pharmaceuticals Ltd (about Rs.3,000 crore),Hindustan Construction Co. Ltd and Suzlon Energy Ltd.

Analysts said banks are going ahead with loan recasts despite the higher provision they need to make on such loans, failing which they would need to categorise these loans as non-performing assets (NPAs), which attract even higher provisions.

“Gammon restructuring was on expected lines. This is a good move for banks also as otherwise they would be forced to classify this as NPA,” said Hatim Broachwala, an analyst at Karvy Stock Broking Ltd.

On a cumulative basis, total restructured loans under the CDR mechanism have crossed Rs.2.29 trillion, or 4.4% of total loans given by Indian banks, as of March. The aggregate figure for bilateral loan recasts is not available, but bankers said such recasts may nearly equal the CDR figure. That would take the total restructured assets of the Indian banking industry to around Rs.4 trillion.

“It (Gammon CDR) seems to be in the ordinary course of things,” said Vaibhav Agrawal, vice-president, research at Angel Broking Ltd. “There are going to be more such cases at least in the next 1-2 years. Probably the peak of restructuring is over but things are not getting any better.”

Indian banks began large-scale restructuring in the aftermath of the 2008 global financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

Indian banks have recast loans of companies across sectors such as textiles, real estate, power and gems and jewellery. About 10-15% of the restructured advances are estimated to have turned bad in the first cycle of loan recasts, but this time the proportion will be higher at around 15-20%, analysts said.