Companies rush to debt recast cell despite tighter norms

BL :K Ramkumar :Mumbai, Oct. 6: 2013

Scene worsened by slack demand, policy logjam

 

There has been no letup in the number of companies seeking debt recast with the Corporate Debt Restructuring (CDR) Cell in the July-September quarter.

Tighter norms prescribed by lenders have not deterred companies from going in for CDR, as they are unable to service their debt.

Weighing the companies down are slack demand, policy logjam coming in the way of project implementation and shortage of raw materials.

Common platform

In the reporting period, 31 companies with debt aggregating about Rs 25,000 crore were referred to the Cell, which is a common platform of the banking industry to help companies cope with their debt burden.

The big cases that have been referred to the Cell for debt recast in the July-September quarter include Lanco Infratech and Bombay Rayon Fashions, with debt amounting to about Rs 7,500 crore and Rs 4,000 crore, respectively, said a senior public sector bank official.

 In the April-June quarter, 28 companies with debt aggregating about Rs 39,500 crore were referred to the Cell. Overall, in the first six months (April-September) of the current fiscal, 59 companies (against 74 in the corresponding period last year) have been referred to the Cell with debt aggregating to about Rs 64,500 crore (Rs 39,435 crore).

 The quantum of debt referred in the April-September 2013 period is about 63.5 per cent more than in the corresponding year-ago period.

This is symptomatic of the fact that besides the ongoing economic downturn, companies are being buffeted, among others, by delays in receiving statutory approvals, forest/environment clearances, land acquisition and shortage of fuel.

 The CDR Cell was jointly floated by banks and financial institutions in 2001 to restructure the debt of viable corporate entities affected by internal and external factors.

Under CDR, creditors make concessions by reducing the interest rate, rescheduling repayments, converting debt into equity, and waiving principal/ interest (to a limited extent).  

Higher contribution

For debt restructuring to be approved by the lenders, the Cell now requires promoters to put up a higher equity contribution — either 25 per cent (15 per cent earlier) of the outstanding debt that is sought to be restructured or 2 per cent of the sacrifice (made by lenders) amount, whichever is higher.

The sacrifice amount is calculated as the difference between the interest a bank will earn under the original loan agreement and the revised (lower) interest it will earn over an extended tenure under the debt recast.

The time period for a company, whose debt restructuring has been approved by the Cell, to turn around has been cut to eight years (10 years earlier) in the case of infrastructure companies and five years (seven years) in the case of non-infrastructure companies.

 Lenders will no longer convert a portion of the loan into equity in the case of unlisted companies.

The conversion will happen only in the case of listed companies so that banks can sell the shares in future.

Viability study

A public sector bank official familiar with CDR said: “We are not allowing any CDR case to just go through. In each case, we do a techno-economic viability (TEV) study.

In each case, the monitoring institution or the lead bank appoints a consultant who carries out a TEV study before the debt restructuring package is finalised.”

He underscored the fact that since the entire promoter shareholding is pledged, banks can change the management if they wish.

What the new norms entail Higher equity contribution by promoters Shorter turnaround time (8 years for infrastructure companies and 5 for non-infrastructure companies) Lenders can no longer convert debt into equity in unlisted companies

(This article was published in the Business Line  dated October 7, 2013)