A Presentation On Corporate Debt Restructuring Mechanism By CA Rajesh Chaturvedi February 4, 2012
What is CDR Corporate Debt Restructuring is basically a mechanism by way of which company endeavors to reorganize its outstanding obligations. The reorganization of the outstanding obligations can be made by any one or more of the following ways: Increasing the tenure of the loan Reducing the rate of interest One time settlement Conversion of debt into equity Converting unserviced portion of interest into term loan 2
Why CDR When a corporate is having severe financial crisis in terms of : Trouble in repaying it s debt obligation Inability in timely servicing of it s interest It generally resorts to Corporate Debt Restructuring Mechanism 3
CDR Borrower s Point of View When a company is having outstanding debts which cannot be serviced under its existing operations it can resort to any of the following courses of action: Enhance its quantum of Debt with an expectation to increase its Profitability & to pay off its original debt, however the company may not be able sustain such enhanced level of debt Cease the current operations of the company & undergo winding up, so this will ultimately lead to unnatural death of company To consider a structured plan to re negotiate the terms of its current debt with existing lenders itself This is where restructuring gains prominence. 4
CDR- Lender s perspective CDR gives the lenders a unique opportunity to avoid being encumbered with NPA s. The primary interest of lenders always lies in recovering the principle amount lent to corporate along with returns on that investment & not in liquidation of assets Apart from this Liquidation proceedings are notorious for yielding low returns for creditors Therefore, CDR becomes an instrument for the lenders, i.e. the banks, to aid the transformation of otherwise Non-Performing Assets into productive assets 5
CDR Is it legitimate in every case Whether a case should be referred for restructuring or not is based upon thorough examination of facts & viability of the case. However, wherever the demand for restructuring is legitimate, and there is a good reason to believe that the corporation may be revived, it must be considered for restructuring. 6
Objectives of CDR By way of CDR there is a hope of preservation of Viable corporate that are affected by certain internal & external factors CDR aims at minimising the losses to creditors & other stakeholders through an orderly & coordinates restructuring programme To support continuing economic recovery 7
CDR Structure The CDR structure in India is based upon the three tier structure as follows: CDR CELL Empowered Group It is third tier of CDR mechanism This cell makes the initial scrutiny of the proposals & if restructuring gets approved this cell makes a detailed plan for restructuring in conjunction with the lenders This group is comprised of the ED level representatives of leading banks along with ED level representatives of concerned lenders This group based upon preliminary report prepared by CDR cell decides whether they should take up the restructuring or not, if yes then they provide initial guidelines When final restructuring plan is prepared by CDR cell the same is again approved by EG Standing Forum This is the top tier in CDR mechanism comprised of representatives of all the financial institutions & banks. This body lays down the policies & guidelines to be followed by the EG & CDR cell for debt restructuring 8
Legal Basis to CDR The legal basis to the CDR System is provided by the Debtor- Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). ICA: All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions, if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors. DCA: Debtors are required to execute the DCA. The DCA has a legally binding stand still agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to stand still and commit themselves not to take recourse to any legal action during the period. 9
Certain Instances of CDR In the past, there have been several companies which have been referred to CDR, few of them are as follows: Subhiksha Retail Vishal Retail GTL Infra Air India Wockhardt India cements Jindal Steel Essar Steel HPL 10
Accounts classification under CDR system Standard & Substandard Accounts Category 1 CDR System Additional funding can be provided Doubtful Accounts Category 2 CDR System NO Additional funding can be provided 11
RBI Guidelines for restructured Account The dues to the bank are fully secured by tangible security (not applicable in the infrastructure projects, provided the cash flows generated from these projects are adequate & escrow mechanism available). The unit becomes viable in 10 years, if it is engaged in infrastructure activities and in 7 years in the case of other units. The repayment period of the restructured advance including moratorium period doesn t not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. Promoter s sacrifice and additional funds brought by them should be minimum of 15% of the banks sacrifice. Personal Guarantee is offered by the promoter except when the unit is affected by the external factors pertaining to the economy and industry, The restructuring under consideration is not a repeated restructuring 12
Exit & Recompense Clause The payment of recompense amount gets triggered in the following circumstances: Mandatory Cases: Exit: The exit of the borrower from the CDR mechanism either voluntarily or at the end of the restructuring period. Performance: If the performance of the borrower in any whole financial year improves in comparison to CDR projections. Declaration of dividend: If the borrower declares dividend in any financial year in excess of ten percent on annualised basis. The recompense amount shall be payable prior to distribution of dividend. 13
Exit & Recompense Clause Methodology: On the occurrence of any of the trigger events, the referring/monitoring institution shall convene a meeting of the Monitoring Committee to determine the quantum of the recompense amount payable by the borrower till the trigger date. 14
Points to be considered while preparing restructuring package S.No. Particulars S.No. Particulars 1. Entry into CDR System. 8. Monitoring Mechanism. 2. Financial Viability Parameters : Benchmark Levels i.e. BEP, RoCE, IRR, Cost of capital & Loan life ratio 9.. Sharing of Securities. 3. Category 1 & 2 under CDR System. 10. Conversion of Debt/Sacrifices in to Equity. 4. BIFR Cases; Eligibility Criteria. 11. Additional Finance and sharing thereof. 5. Cases of Willful Defaulters: Benchmark Levels 6. Borrower Classification for stipulation of Standard Terms & Conditions 7. Time Frame for Processing and Implementation of Restructuring Schemes. 12. Payment Parity. 13. TRA: Treatment For Interest on WC and Term Loan (TL/WCTL/FITL)- Treatment in TRA. 14. Prudential & Accounting Issues 15
Points to be considered while preparing restructuring package S.No. Particulars S.No. Particulars 15 Prepayment of Restructured Debt and Exit From CDR System. 18. Revocation of Restructuring scheme/ Legal action for recovery. 16. Recompense Clause. 19. Re-workout of CDR Packages. 17. OTS/ Assignment of Debts. 20. Exit Cases From CDR System. 16
Certain Case studies
Case Study -1 KSL & Industries Ltd.
Snapshot of the company KSL Industries Ltd. (KSLIL) is the flagship company of Saurabh Tayal Enterprise (ex-major stake holder of Bank of Rajasthan) KSLIL is a Mumbai based conglomerate engaged in India s fastest growing industries i.e. Textile & real estate Company is having spinning facility, knitting facility & processing facility in the various parts of the country i..e at Nagpur, Dombivali & Wada. KSLIL embarked an expansion project at it s units located at Kalmeshwar & Nagpur after due appraisal in the FY 2010 & 2011
Current Financial performance Particulars FY 09 FY 10 FY 11 FY 12 (H1) Sales 819 1031 1306 740 EBIDTA 158 157 187 121 % EBIDTA 19.3% 15.2% 14.3% 16.3% Interest 57 73 86 64 PBT 30 (4.4) 2.1 8.0 PAT 24.37 4.00-3.42 6.38 Cash Accruals 96.64 94.09 96.07 56.61 Long term Debts 860.27 897.28 867.02 839.38
Why CDR for KSLIL Increasing in cost causing reduction in profits Affecting the business volumes Deficit in cash flow Inadequate working capital
Reasons for deterioration of financial position As explained before company had undertaken an expansion project in FY 2010 & 2011, however during the project implementation the textile industry underwent major change causing a major deviation in the assumptions envisaged during project appraisal & present scenario such as : Increase in cotton Cost 54% Increase in power cost 38% Increase in Labour cost - 35% Increase in yarn price 19% Increase in Knitted fabric cost 5% As can be seen there was a major increase in the cost but commensurate increase in the income was not reflected causing a significant gap in the profit envisaged & actual profits earned
Other Reasons for deterioration of financial position Due to industry downturn delay in receipt of receivables Delay in receipt of TUFS subsidy Changes industry dynamics - Past profitability not sustainable in prevailing circumstances
Cash flow Analysis Particulars FY10 FY11 HFY-12 Total EBIDTA Less Tax 158 186 120 464 Net Current Assets (20) 43 22 45 Suplus Post NCA built up 178 143 98 419 Capex 147 24 3 174 Surplus after Capex 32 118 95 245 Interest Obligation 73 86 63 222 Principal Obligation 89 34 35 159 Total Debt Obligation 162 120 99 381 Surplus/(deficit) post debt servicing (130) (2) (4) (136)
Management Initiatives & Business plan Exhaustive restructuring plan is to be prepared to revive the operations & profitability. Certain modifications and up gradation to the machineries to improve production and productivity, these will entail saving in labour cost & other overhead cost
Debt realignment proposal (Holding on operations) Till the time of designing & implementation of restructuring following steps shall be taken Lenders not to recover any Loan installments and interest Lenders not to levy of any penal charges for delays / irregularities Continuation of working capital limits at existing levels Till implementation of restructuring package, cash / cheque deposits made in the KSL s accounts, would be allowed to be withdrawn, without any adjustment against any dues payable to the bank.
Debt realignment proposal 1. Term loans: Repayable in 10 years No moratorium period available in order to comply with subsidy guidelines Interest to be charged at concessional rate of 10% Waiver of the unpaid penal & compound interest 2. Working capital limits: Working capital limit to be assessed based on FY13 numbers Reduced rate of interest @10% Reduction in working capital margins from earlier 25% to 10% LC & BG margins also reduced
Debt realignment proposal 3. Funding of Interest: Interest due upon the term loans & working capital loans to be converted into Funded interest term loan Repayable in 2 years starting from 30 th June 2015 Interest on FITL to be charged @5% 4. Foreign Currency convertible Bonds(FCCB s): 25% of the FCCB amount to be paid within 6 months of restructuring Reduced coupon rate @2% Yield to maturity of 4%
Debt realignment proposal 5. Promoter s Contribution: Promoter s to infuse fresh contribution to the extent of 15% of lenders sacrifice 50% of the same to be infused immediately & remaining within 6 months
Post debt restructuring scheme Post approval of restructuring scheme and subject to timely availability of adequate working capital can generate decent Revenue and EBIDTA levels sufficient to meet the debt servicing requirements post restructuring. Financial Year FY12-H2 FY13 FY14 FY 15 onwards Total Revenues 606 1320 1338 1360 EBIDTA 33 80 94 118 EBIDTA % 5.4% 6.1% 7.0% 8.7%
Post debt restructuring scheme The above projections are fully sensitized for further downside risks, so it is very much likely that after implementation of the package the company will able to restore its old shape. The restructuring package is expected to act as a breather for the company.
Case study -2 Kingfisher Airlines
Kingfisher s Debt recast package If we look at the books of Kingfisher, banks & FI s have taken the following CDR route: Rs. 750.10 Crores of loans were converted into 7.5% compulsorily convertible preference shares which thereafter converted into equity Rs. 553.10 Crores of Loans were converted into 8% Cumulative Redeemable preference Shares redeemable at par after 12 years. Repayment of the balance loans was rescheduled with a moratorium on repayment of principal of 2 years and step-up repayment over the subsequent 7 years Interest for the period July 1, 2010 to March 31, 2011 on loans from the banks was converted into a funded interest term loan repayable in 9 years including 2 years moratorium. Interest rate on loans reduced by over 300 bps Additional fund based loan facilities of Rs.768.32 Crores and nonfund based facilities of Rs.444.40 Crores sanctioned by the banks Part of the working capital limits of Rs.297.40 crores converted into working capital term loans. 33
Analysis of the debt recast package Action Taken Impact upon company 1. Conversion of loan into equity Reduction of interest burden 2 Conversion of loan into cumulative redeemable preference shares Reduces the interest burden, dividend is payable to shareholders only upon the generation of profits Company needs to pay dividend distribution tax, loss of interest deduction too 3. Moratorium period of two years Reduces the stress upon cash flow as there will be no repayment liability for 2 years 34
Analysis of the debt recast package Action Taken Impact upon company 4. Conversion of unserviced portion of interest into term loan Reduces the penal interest liability 5. Reduction in Rate of interest Reduces the cash outflow in terms of interest 6. Additional limits sanctioned Will help the company to manage its operational expenses till the time it gets stabilised 7. Working capital limit converted into Working capital term loan The limit will not be affected by the net working capital of the company it will be intact inspite of the reduction in net working capital 35
CDR Mechanism Concluding remark The CDR mechanism attempts to be a one-stop forum for lenders and creditors to arrive at mutually agreeable terms to secure their interests, however varied they may be. With the involvement of multiple lenders, there is every chance that any restructuring process would face obstacles and timedelays. These are the very problems that the RBI s informal CDR system aims to address by setting up a framework for swift and timely action. 36
Thank You