BackLenders move to restructure HCC’s debt under S4A scheme
Lenders to conduct a viability test first; final decision will be taken within 90 days, says CMD Ajit Gulabchand
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Lenders to infrastructure firm HCC Ltd are assessing restructuring of the firm’s debt under a recent scheme of the Reserve Bank of India (RBI) which allows banks to convert part of the company’s loans into equity-like instruments.
The joint lenders’ forum or JLF meeting of HCC held on 12 July 2016 “has passed to resolve the account under the recent RBI guidelines ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’," the company informed stock exchanges on Wednesday. This will help HCC bridge the “cash flow timing mismatch" between realization of claims and servicing debt, said the company.
A person close to the development said the proposal is under discussion and has not yet been approved. Lenders will conduct a viability test and take a final call based on advice from the overseeing committee, this person said, requesting anonymity.
A final decision will be taken by lenders within 90 days, said Ajit Gulabchand, chairman and managing director of HCC.
Under the S4A scheme, the debt of the firm will be split into two parts: sustainable debt, which cannot be less than 50% of existing debt and will have to be serviced based on the same terms as that of existing facilities, and unsustainable debt, which can be converted into equity or redeemable optionally convertible preference share/ optionally convertible debentures, with clearly spelt out terms. An overseeing committee will vet the processes followed by bankers while using the S4A scheme.
“The move comes at an opportune time, as HCC is on a recovery path, with order book growth of 35% in last 15 months with the government’s focus on infrastructure. HCC faced a challenging period due to the slowdown of sector in the past and delay in payment of its legitimate dues by the government agencies of arbitration awards over ₹ 3000 crore," HCC said in the press release.
“... in the last 10 quarters, HCC has emerged as one of the best performing companies in infrastructure sector with EBITDA margins of 16-18% through a series of initiatives aimed at improving operational efficiencies, cost rationalization, strict adherence of dispute resolution process and monetization of certain assets at fair value," the company added.
This is not the first time that lenders are restructuring the company’s debt. In 2012, HCC had entered the corporate debt restructuring (CDR) process, which was then widely used to restructure debt of struggling firms. Many of these companies exited the CDR cell unsuccessfully. HCC is still under the CDR cell, said a banker familiar with the case.
“HCC, which approached CDR or corporate debt restructuring in January 2012, has made efforts to remain standard with the banks, while many other companies from the sector who got referred to CDR failed to take off and had to exit CDR for default," the company said in its press release.
“We have to find a fair solution for all—company, shareholders and lenders," HCC’s Gulabchand said. “This solution will give more time to the company to address the problem of cashflow mismatch that we are facing due to arbitration. This option will give more deeper solution to restructure the debt."
Gulabchand said lenders may convert the debt into equity or optionally convertible preference shares or optionally convertible debentures. Gulabchand noted that there are no losses on the books of the company as there is no unsustainable debt. “Our issues will be settled as soon as we get the dues. In fact, we are asking the government to clear our dues rather than dragging us into this issue," Gulabchand added.
The S4A scheme was introduced by RBI in June as yet another option that banks can use to resolve stressed assets. In contrast to the strategic debt restructuring (SDR) scheme, the S4A scheme does not require banks to change the management of the stressed firm. For this reason, some analysts feel that the scheme would be preferred by lenders and promoters.
“S4A incentivises existing promoters to opt for this scheme as they can continue to hold majority stake. Further, banks have the option of holding optionally convertible debentures instead of equity, which might be more preferred," said CRISIL in a note on 15 June.
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