Unable to find buyers for stressed companies after deciding to convert debt into equity under strategic debt restructuring (SDR), lenders are planning to recast such loans, most likely through the JLF route, two senior bankers told FE.
However, since loans to most companies under SDR have already been recast through the corporate debt restructuring (CDR) mechanism, a second restructuring would render them non-performing.
According to a banker, several companies under SDR have already been classified as NPA under the asset quality review (AQR) of the Reserve Bank of India (RBI). “At least a recast would give them some moratorium,” he said, adding that promoters are also seeking recast unwilling to give up management control under SDR. For instance, Electrosteel Steels and Visa Steel could be recast since lenders have not been able to find buyers.
Another senior public sector banker said if the company is able to recover from the present stress and its cash flow improves, it will be easier to find a buyer at that time. “While the SDR mechanism has not been able to solve the debt problem, a recast would be the only way out,” he explained.
Vibha Batra, senior vice-president, ICRA, said in a distress sale the haircuts could be higher which is a permanent loss. “However, if a bank continues to hold the asset on its books, the provisioning requirement would go up but will not be a permanent loss as in the case of a distress sale,” she added.
Last year, banks had decided to convert Rs 2,507.57 crore of loans into shares under SDR. RBI’s strategic debt restructuring guidelines allow banks to convert debt to equity at a value which is not less than its face value. In FY15, Electrosteel Steels reported a net loss of Rs 624 crore on the back of Rs 1,831 crore in revenues. Its interest expenses more than doubled to Rs 452 crore.
The consortium comprises 27 lenders who agreed to restructure the company’s debt via the corporate debt restructuring (CDR) cell in September, 2013, while IL&FS and HUDCO recast their debt outside of the CDR cell.
Term loans restructured by banks stood at Rs 5,768 crore.
The company is promoted by Electrosteel Castings, which owns 45.23% of the equity; Electrosteel Castings is owned by the Kejriwal family. While lenders were able to draw interest from London-based First International Group (FIG), talks fell through recently after FIG withdrew its proposal. Talks with Tata Steel, another suitor, did not materialise as well as the company had sought a deep haircut. Meanwhile, bankers added that an interest from an offshoot of the Dalmia family has also not worked out.
Meanwhile, Visa Steel’s debt of around Rs 3,000 crore was restructured under the CDR mechanism in FY13. In September last year, lenders decided to convert a large portion of debt into equity using the SDR scheme.
Other lenders to Visa Steel are Bank of Baroda (BoB), Punjab National Bank (PNB), Bank of India (BoI),
Canara Bank a few banks from the SBI group and Syndicate Bank.
In FY15, Visa Steel reported a loss of Rs 273 crore on the back of Rs 1,260 crore in net revenue. The finance cost of the company more than doubled on a year-on-year basis in FY15 to Rs 229 crore and according to Bloomberg data its gross debt stood at Rs 3,094 crore in FY15, up 10.5% from the previous year.