[T.S.R:16955] Modern Dairies, Ispat, Kingfisher, et al; Junk Remains Junk-CDR Or No Corporate Debt Restructuring

Corporate Debt Restructuring-Are Banks Fudging NPA's? Where's RBI? 

By not intervening, the Reserve Bank of India has only aided the rise of lenders helping promoters. How many times should lending institutions restructure the debt of an ailing company? And, for how long should they wait for a firm's operations to show signs of revival? One would expect the answer to the first question to be once, and to the second, two years.

 

So, what would you say if you come across cases where the promoters have been given two-three chances and the lenders have waited for several years for a turnaround? Or, if corporate debt restructuring (CDR) has been approved without taking into account the ground realities? One would assume that either the financial institutions are hand-in-glove with the owners, or, lenders are not doing their job.

 

These are, indeed, the criticisms being hurled at the Indian financial institutions and banks in the wake of at least two cases – Ispat Industries, recently sold to Jindal Steel, and Kingfisher Airlines.

 

Before the Mittals recently sold Ispat to the Jindals, the company had been a non-performer for almost a decade. However, its lenders administered two doses of CDR and waited for seven years before deciding to effect a change in management.

 

Kingfisher Airlines, which has shown few signs of recovery since it bought low-cost carrier Deccan Aviation (Air Deccan) in 2007, has got the approval for a CDR package. The new terms of the restructuring, approved in October 2010, include part conversion of debt into equity and a lower interest rate.

 

In the case of Ispat, the management reneged on a number of commitments it had made to the institutions in 2003 for many years. Despite this, in May 2009, a reworked package was prepared to give Ispat more time. As late as October 2010, just months before its sale, the lenders noted that the company did not seem to be interested in adhering to its 2003 package.

 

Only when the company lobbied for a third CDR, and failed to woo a strategic partner, the lenders decided it was enough. Only then was Ispat put on the auction block. Clearly, the financial institutions waited too long to take action against Mittals. The new owners of Ispat refused to comment on what had happened in the past.

Similarly, although Kingfisher's net loss in the first half of 2010-11 came down to Rs 230 crore, from Rs 419 crore in the same period the previous year, it was partly on account of a lower provision for taxes. In addition, experts, like those from the Centre for Asia Pacific Aviation (Capa), feel "a complete recovery from the turbulence of the last couple of years will still take time" for the aviation sector.

 

It will be difficult for Kingfisher to start repaying its recast loans, which have now come down from Rs 7,651 crore to Rs 6,007 crore, from 2012-13, as stated in the CDR package. The company spokesperson said he could not speak on the issue because of the silent period before the forthcoming issue of Global Depository Receipts (GDR).

 

Logically, one would have expected the banking regulator, the Reserve Bank of India (RBI), to have intervened in both the cases. But the truth is that the central bank chose to keep its distance from such CDR packages. In fact, it unwittingly encouraged them. RBI only referred us to the various master circulars and guidelines it had issued on CDRs since 2001.

 

To begin with, RBI imposes no limits on the number of CDRs that can be offered to the same company as long as the account remains viable. This discretion has been left to the consortium of lenders to decide.

According to RBI's draft guidelines (May 6, 2005), it "would not be a member of CDR Standing Forum and Core Group (and) its role will be confined to providing broad guidelines". The laying of the detailed policies was left to the Standing Forum, which is "the representative general body of all financial institutions and banks participating in the CDR system".

 

On February 5, 2003, RBI extended the CDR option for "doubtful" loans, apart from "standard and sub-standard" ones. The justification: Because "there have been instances where projects have been found to be viable by lenders, but accounts could not be taken up for restructuring under the CDR system, as they fell under the doubtful category".

 

The May 2005 guidelines also enabled lenders to extend CDR to wilful defaulters. So, if the CDR Core Group, carved out of the Standing Forum, thought that a wilful defaulter would rectify his mistake if offered a CDR package, it could approve such restructuring of debt.

 

Moreover, RBI has extended special CDRs to a sector or industry as a whole. For instance, Kingfisher's CDR was part of an industry package for the aviation sector, approved by RBI in mid-2010. During the 2008-09 economic slowdown, the central bank allowed easier CDRs, as it feared several companies could go down if their debt burden was not reduced.
 

FEELING THE HEAT Ispat industries (Rs crore)
Particulars	Standalone financial results
	Quarter ended  September 30		Fifteen months  ended June 30
	2010 unaudited	2009 unaudited	2010 audited
Total sales/ income from operations	2,184.58	2,048.64	10,576.52
Total expenditure	2,415.58	1,901.09	9,629.70
Net profit/(loss)	(331.62)	(79.41)	(322.34)
Sources: Companies

 

Couple the RBI mindset with the fact that promoters, too, find enough reasons to justify the first, second, and even a third CDR. For example, in its discussion document (January 2011) for investors, Kingfisher hinted at a near-term turnaround of its operations.
 

NOT SO GOOD TIMES Kingfisher Domestic                                               (Rs crore)
	FY09	FY10	H1FY11
Operating revenue	5,137	4,522	2,362
Other income	308	153	177
Fuel cost	2,476	1,505	746
Non-fuel cost	2,977	2,623	1,150
Rentals	1,040	864	358
Ebitda	-1,047	-317	285
Ebitda margins	-0.19	-6.8%	11.2%
Ebitda minus other income	-26.4%	-10.40%	4.6%
* Account groupings for FY09 & FY10 are adjusted on the basis of H1FY11

 

One, the aviation market is bound to grow at a frenetic pace and, according to Capa, domestic rates will "expand at 14.8 per cent CAGR through 2020". Two, Kingfisher earned an operating profit (with a net loss) in the first half of 2010-11. With lower debt and lower interest, profitability could improve in 2011-12. Three, company will see huge infusion of funds through its proposed GDR issue.

 

Ispat, too, had painted such rosy pictures while negotiating the restructuring with financial institutions. It talked about quick financial closures for its proposed captive power plant, one million tpa coke oven, and a 2 million tpa pellet plant. It stated inflow of huge sums through sale of flats at its Peddar Road property in Mumbai. But then, it found other explanations to delay the process.

 

In the end, it is for financial institutions and banks to figure out the genuineness of promoters, as well as the potential of a sector, before finalising a CDR package. If the only reason behind the CDR system is to prevent a loan account from becoming a non-performing asset, promoters will invariably manage to put pressure on lenders. RBI cannot watch these developments from a distance. It has to become an interested participant.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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