Restructuring of Corporate Debt

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<ul><li><p>RestructuringofCorporateDebtsWayForward </p><p>September2012</p></li><li><p>MessageMessagefromthedeskoftheSecretaryGeneral,ASSOCHAMThe economy ispassing throughoneof themostdifficult timeswithallammunitionwith theglobal regulatorsandgovernmentscatchingmoisture,toputtheeconomiesonrail.Thefallinggrowthrates, persistently high inflation, exchange rates creatingunmanaged volatility, increasing cost of commodities, policyparalysis at home and politics superseding the economics, haveshowed up large challenges tomanage the stability of financialmarketsaswellascontinuetomaintainviabilityofthebusinesses.Undersuchtestingtimeswithunexceptionalstressbuildingup inthebankingsector,thisistheopportunetimetohaveapeepintotheworkingof thesector, findout thereasonsandputthemonbed for treatment before they go into ICU reducing chances ofrecovery.Against this backdrop, ASSOCHAM jointly with Resurgent IndiahavecomeoutwithaStudyonRestructuringofCorporateDebtsto act as awarning bell so that thematter is addressed at theearliest. The study is timely and would definitely be useful forpolicymakers, Bankers and all stake holders.Any suggestion toimprovethestudyiswelcome.ASSOCHAMacknowledgesthegoodworkdonebyResurgentIndiaresearchteaminbringingoutthisexhaustiveandreferralstudy. WithBestWishes, D.SRawat31stOct.,2012 SecretaryGeneralNewDelhi ASSOCHAM</p></li><li><p>PrefaceDue to economic slowdown, deteriorating asset quality and liquidityconcerns, theGlobalBanking Industryhasbeenunder stressover thepastyears. On theotherhand,the IndianBanking industryhasgrownconsistentlyatahealthypace.In2012,thebankingsystemfacestoughenvironment both at home and abroad. The increase in assetrestructuringisbecomingamajorcauseofconcernforIndianBanks.Asper data released by Corporate Debt Restructuring Cell, total debtrestructuring by Indian companies shows a 42% yoy growth in June2012. Correspondingly,detailsavailable from41banksshowstandardassetrestructuringincreasingbymorethantwoandahalftimes,duringFY12onayoybasis.At present, the Indian banking industry is at defining moment, withreforms,innovationandnewdriversexpectedtopoweritsnextphaseofgrowthinthecomingyears.ReserveBankofIndiahastakennumberofinitiatives inthepastyearssuchasderegulatingsaving interestrates,anewbanklicensingpolicyfortheprivatesectorandCDS(CreditDefaultSwap) are expected tomake the banking industrymore efficient andcompetitive.WithsuchprudentmeasuresfromReserveBankofIndiaitwillhelpstrengthenthebanks,despitetheassetqualityconcerns.</p><p>Corporate Debt Restructuring will soartoINR3.25LakhCrthisfiscal,about13times the annual budget for buildingroads,ascompanies comeunder stressdue to the worsening economicslowdown, threatening to weaken thebankingsystemRatingcompanyCRISILCRISIL has raised the CDR estimate forthis fiscal by 63% in just about fivemonths from its previous estimate ofINR2.00 Lakh crore, reflecting the fastdeterioration in the financial health ofcompanies.</p></li><li><p>ContentsSECTION1 ANOVERVIEW 5SECTION2 CDRANALYSIS 7SECTION3 REGULATORYDEVELOPMENTS 14</p><p>SECTION4 WAYFORWARD 18SECTION5 CASESTUDIES 20CONCLUSION 23 </p></li><li><p>Section1AOverviewThe global financial crisis has distressed the corporate sector in anumberofcountries,affectedbothbyatighteningofcreditandweakerconsumer demand. One of the most daunting challenges faced byeconomicpolicymakersisonthelargescalecorporaterestructuring.Theobjectives of largescale corporate restructuring are in essence torestructureviablecorporationsandliquidatenonviableones,restorethehealthof the financial sector,and create the conditions for longtermeconomicgrowth.Usuallyasequenceisfollowedinasuccessfulgovernmentledcorporaterestructuringpolicy:</p><p> Formulation ofmacroeconomic and legal policies that lay thefoundationforsuccessfulrestructuring.</p><p> Financial restructuring must start to establish the properincentivesforbankstotakearoleinrestructuringandgetcreditflowingagain</p><p> Onlythencancorporaterestructuringbegin inearnestwiththeseparating out of the viable from nonviable corporationsrestructuringtheformerandliquidatingthelatter.</p><p>Themaingovernmentledcorporate restructuring toolsaremediation,incentiveschemes,bankrecapitalization,assetmanagementcompanies,and the appointment of directors to lead the restructuring. Afterachieving its goals, the governmentmust cut back its intervention insupportofrestructuring.AsstatedbyDr.K.C.Chakrabarty(DeputyGovernor,RBI)Restructuringrefers toseveral relatedprocesses: recognizingandallocating financiallosses, restructuring the financial claims of financial institutions andcorporations, and restructuring the operations of financial institutionsandcorporations.The genesis of the current scenario, in which a large number ofrestructuringcasesarebeenreferredtotheCDRcell,goeswaybackto2006through2008followingrapideconomiccyclesofboom,recessionand stimulusdriven revival bringing it now to sheer stagflationaccentuatedbytotalpolicyparalysis.</p></li><li><p>Theboom inperiodafter2006gaveakickstarttothedemandforriskequity capital when investment and merchant bankers had field dayraising initial public offerings, followup on public offers, qualifiedinstitutional placements, privateequity investmentsand foreigninstitutional investors that flooded eastwards from the WesternfinancialmarketsconsequentupontheWesternmeltdown.FollowingthepostLehmancrisis,beginning2009themarkets losttheireuphoria. Raising equity at high EVs became difficult and capitalintensive industries inengineering,procurement, reality, infrastructureandpowerhadtogoinforlargescaledebtfundingviatermborrowingsfrom commercial banks and developmental finance institutions,increasinglypresentNBFCsandalsoexternalcommercialborrowings.TheReserveBankof India(RBI),concernedwithhigh inflationresortedto raising thekey repoand reverse repo ratesa record13 timessinceMarch 2010 only to slow down in last few quarters. Thismade debtservicing for the industries more expensive. Suffocated withhighinterestrates,defaultsininterestandinstalmentsbegantobecometheorderof theday.Theheadyboomhavingcome toanabruptend, thefocus has now shifted to numbers ofbad loansordistressed assetsastheyaretermedintheWest.This brought in an era of corporatedebt restructuring(CDR), nowdenotedGreeningofloans.Itseekstorecognizeimpairmentbyallowingthe reorganization ofoutstanding debtobligations by bringing aboutreductions in the burden of the mounting/compounding debtslessening in the interest rates and rescheduling the instalments byextendingthetermofrepayment.Thisenablesincreaseintheabilityofthe borrower tomeet debt obligations by letting the lenderwaive inpartorforgiveorconvertapartofdebtintoequity.According to theCDRCell,during fiscal2012bankshave restructuredINR64,500crorean increaseof156%overthepreviousyearwhenthebanks filed84cases.Thismakesrestructuringthehighestsince itslaunch in2001.Ithashelpedrevivethemacroeconomicconditionsforboth the banks by promptly recognizing and providing for theimpairmentoftheirnonperformingassetswellintime.Theborrowersarealsoabletoreducetheir interestandprincipaldebtburdensbyproviding forsufficientbreathingspace togenuinelyviableunits to enable them to bring about a turnaroundwithout having toresort to tedious DRT and court procedures or end in winding upproceedings.</p><p>Therestructuredstandardassetsattheend ofMarch 2012 have increased by46per cent to INR 1,55,000 crore andarepoisedtogouptoINR2lakhcrore,CrisilForecasts</p></li><li><p>Section2</p><p>CDRAnalysisIntroductionACorporateDebtRestructuringmechanismwasfirstintroducedin2001.It isavoluntary,nonstatutorysystemthatallowsafinanciallytroubledcompanywithmultiple lendersand loansofmorethan INR20croretorestructure those loans to a plan approved by 75% or more of itslenders.NeedforCorporateDebtRestructuringBanks have to face various difficulties while restructuring their largeexposures speciallywhich are involvingmore than one lender, underconsortium / multiple banking arrangements. In the background ofthese difficulties, need for such a specialized institutionalmechanismarose.Ifarestructuringinvolveasinglebank,itbecomeseasierforthebankstonegotiatethetermsofrestructuringoftheirownexposurewiththe customers but where a restructuring involved multiple lenders,banks find it difficult to coordinate their individual negotiation andmonitoringeffortswiththeotherbanksinvolved.Keepinginmindtheabovefacts,ReserveBankofIndiaputinplacetheschemeofCDR inAugust 2001basedon themechanismprevalent incountries like theseizedof thematterU.K.,Thailand,Korea,Malaysia,etc.TheseguidelineswerefinalizedafterextensivediscussionbetweenGovernmentofIndia,ReserveBank,BanksandFIs.The main objective of the CDR framework was to ensure timely andtransparentmechanism for restructuring thecorporatedebtsofviableentities facing problems, outside the purview of BIFR,DRT and otherlegalproceedings,forthebenefitofallconcerned.RecentStatistics</p><p>CDRCellPerformanceReport(AsonMarch31,2012)TotalReferences</p><p>ReceivedCases</p><p>Rejected/Closed</p><p>CasesunderfinalizationofRestructuring</p><p>packages</p><p>TotalCasesApproved(includingcases</p><p>withdrawn/Exited)No.ofcases</p><p>AggDebt</p><p>No.ofcases</p><p>AggDebt</p><p>No.ofcases</p><p>AggDebt</p><p>No.ofcases</p><p>AggDebt</p><p>365 182611 53 17571 36 22525 276 142515*Agg:Aggregate</p><p>Source:www.cdrindia.org</p></li><li><p>As shown in the above table, In the last financial year endingon 31stMarch2012,ofthe392casesworthINR.2.06LakhcrorereferredtotheCDR Cell, 292 havebeen approved or resolved i.e. 1.50 Lakh crore ofdebtrestructuredundertheCDRmechanism.HoweverwecanseealsoseetheperformanceoftheCDRcellinthefirstquarterofthecurrentfinancialyear201213i.e.fromApril2012toJune2012inthebelowmentionedtable:</p><p>CDRCellPerformanceReport(AsonJune30,2012)TotalReferences</p><p>ReceivedCases</p><p>Rejected/Closed</p><p>CasesunderfinalizationofRestructuring</p><p>packages</p><p>TotalCasesApproved(includingcases</p><p>withdrawn/Exited)No.ofcases</p><p>Agg*Debt</p><p>No.ofcases</p><p>AggDebt</p><p>No.ofcases</p><p>AggDebt</p><p>No.ofcases</p><p>AggDebt</p><p>433 227021 63 21377 61 37172 309 168472*Agg:Aggregate</p><p>Source:www.cdrindia.orgInthe firstquarterofthecurrentFY1213,CDRhasreceivedtotal433casesworthINR2.27Lakhcroreofwhich309casesworthINR.1.68hasbeenapproved/resolvedunderCDRmechanism.A report from Standard &amp; Poors talked about Indian banks weakerassetqualityandearningsacrossthesectorin2012,withcreditgrowthpredictedtofallto16%,from23%theyearbefore.Indiasbanksweakeningassetqualityisalsoclearfromthemarkedrisein debt restructuring agreements, ahalfway house between paymentand default used by the banks for struggling businesses such asKingfisherAirlines. Taken together,HCCsmixofbad and restructuredloansroseto4.3%ofoverall lending inthethirdquarter,upfrom25 inthesameperiodlastyear.Corporate debt has spiked by over 300% this fiscal, already touchingINR76,251Crores, against INR 25,054 crorein the previous fiscal. Thisbrings theoverallCDRassets in thesystem toover INR19LakhCrore.Thisisalarming.CreditratingagencyStandard&amp;Poors,inarecentconferencecallwiththemedia, said that restructured loanswere expected to increase toaround4%of advances (of thebanking system) at this financial yearend,from2.6%ayearago.In201213,restructuredloansareexpectedto be 45% of advances. The S&amp;P analyst alsosaid that 2550% ofrestructuredloansmayslipintoNPAs</p></li><li><p>In the AprilJune quarter of 201112, the cell received 16 corporaterestructuringcaseswithdebtof INR4,682crore. IntheJulySeptemberquarter, it received 19 cases (with debt of INR23,071 crore); in theOctoberDecember quarter, 25 cases (INR 22,497 crore); and in theJanuaryMarchquarter,23cases(INR26,001crore).Corporatesicknessseems tobespreading.Earlier,anaveragebankwouldhavenotmorethan 34 corporate debt restructuring cases at a time. But now anaveragebankdealswithabout30cases.Loans worth INR 19000 crore were referred for corporate debtrestructuringinthe1stquarterof201213showing30%higherthanthepreviousquarter. Asmanyas37accountswere referred to theCDRCell.Visa Steel (INR3,000 crore), Tayal Group (INR2,811 crore) and InduProjects(INR2,800crore)wereamongthebiggestloansrestructuredinthequarter.</p><p>SourceNDTVNewsJuly8,2012CompaniestrappedinhighdebtIndia needs infrastructure such as roads and utilities and that is thereason that such companies are better positioned because of theirexperience.But the debt they have accumulated over the years is analbatrossaroundtheirnecks.Atthattime,companiesmorethantripledtheirdebt,biddingforprojectsmuchbiggerthanwhattheirequitycouldsupport. Indiscriminate lendingbybanks,proddedbythegovernment,isback tohaunt thesecompaniesasmost lendershavehit their limitsandarestaringatdefaults.Afewrecentreportshighlightedmorethantwodozenhighlyleveragedlargeborrowers,includingAdaniPower,EssarOil,TataCommunications,Electrotherm India and JaiBalaji,manyofwhichofmay require futuredebtrestructuring.Duringtheperiod from2007to2011,thedebtofGMR Infra (operatesthe New Delhi airport) jumped 6.7 times, BGR Energy and IVRCL(contractorofroadandwaterprojects)hada5.4fold jump in itsdebt.Apart fromthemthere isGVKPower (whichrunsMumbaiairport)haditsdebtclimbby3.59times. AlsoJaypee Infratech (whichbuilt IndiasonlyFormula1racetrack inNewDelhisuburb)hadadebtjumbby31timesinthreeyearsfromINR200croreinfiscal2008.SinceMarch2011,ninenewironandsteelsectorcasesvaluedatR3,041crorewereapprovedbytheCDRcell.</p><p>SectorsmorepronetoCDR Iron&amp;Steel Textiles Telecoms Fertilizers Sugar Cement Petrochemicals&amp;Refineries</p><p>NewSectorsemergingforCDR Infrastructureand NBFCs</p></li><li><p>Telecom infrastructure service providers like ICOMM Tele were alsoapproved for restructuring. Telecom sector loan accounts worth INR4,459 crorewere approved for restructuring during theperiodMarch2011toJune2012.Many are headed for debt restructuring where lenders may imposestrict conditions and dilute equity that could hurt stockholdersinterests.CDRAhelpinghandtoIndianCompaniesDuring theperiod from 2001 to 2005,when the totaldebtwasmorethanINR75,000crore,about138caseshasbeendealtbyCDRcelloutofwhich75%ofthecasesweresuccessfullycompletedwiththecompaniesabletomeettheirdebtobligations.In2009,byDecemberend the cellhad received 208 caseswhere thetotalamountstoodatINR90,888crores.Fromthis29cases,whichhada total tallyof5018 croreswerenotaccepted173 caseswhere theaggregate amount was INR 84,510 crores were executed as per theprogram.Theseproposalswerefromvarious industries. Therewasa3timesincreaseinthenumberofcasesthecellgotin200910from200809.CRISIL states thatbyMarch 2013 the banksmighthave to issue suchloansworth INR 2 trillion.DuringApril 2012, the CDR cell has got 14proposals for restructuringdebts.Eightof these companiesare textileorganizations from theTayalGroup.Theother companiesare ICOMMTeleLimited,PCHRetail,andSuryaAlloyIndustriesLtd.FollowingaresomecompanieswhohavereceivedCDRbenefits:</p><p> GTSInfrastructureagroupspecializingintelecomtowers DeccanCargoandExpressLogisticsetupbyCaptainGopinath BASIXmicrofinanceorganization BharatiShipyard</p><p>The companies mentioned below are waiting to receive approval fortheirCDRapplications:</p><p> HotelLeelaventures Lavasa HCC</p><p>Hotel Leela venture Ltdhad applied forCDR in February2012.At theSeptember2012CDRmeetingheldwith thebanks, Leelaventurewastold to repay its entire outstanding principal amount in 8 years fromJanuary2014. Italsohas topool inall itshotelproperties (...</p></li></ul>

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