THECORPORATETREASURER.COM38 CORPORATE TREASURER APRIL / MAY 2016

Banking on debtTo turn corporate bad loans into performing assets, the Reserve Bank of India has nudged its debt restructuring rules to grant lenders an easier way out of defaulting companiesAnn Shi reports

“[We] had no problem re nancing

our loans”

On February 25, the Reserve Bank of India (RBI) tinkered with its rules on strategic debt restructuring (SDR) by cutting in half the

proportion of a defaulting fi rm’s shares an Indian lender must divest in the fi rst 18 months after converting debt to equity.

Previously, lenders had to divest 51% of the equity to new investors after a debt-to-equity conversion. They now only need to sell 26% of the shares they hold in a defaulting borrower. The recent reduction is intended to give lenders a more fl exible exit, with the upside of a defaulting company possibly turning itself around.

“To avoid substantial sacrifi ce of banks under the SDR at the time of divesting the shareholding to new promoters, as also to keep the possible upside option for banks, it has been decided that an option may be with banks to divest a minimum 26% [at the beginning] and remaining shares in the due-course of time as and when they fi nd adequate value,” Sudarshan Sen, principal chief general manager at the Department of Banking Regulation of the RBI, explained to The Corporate Treasurer after announcing the change.

BUY A DEFAULTERThe SDR regime, reinforced by the central bank last June, granted banks the right to convert outstanding loans into a majority

stake in a defaulting company if the borrower failed to meet the conditions agreed in its negotiated restructuring package. The move was made to tackle the sharp increase in corporate debt defaults in the country.

After the debt-to-share conversion, lenders can bring in a new promoter – the majority shareholder group that manages the day-to-day affairs of a company in India – to help improve the management of a stressed fi rm and hopefully repay the debts. The SDR was designed to encourage defaulters to pay back debts more quickly

by selling their assets, as management executives would fear being kicked out.

RBI’s Sen expects that new promoters who have adequate expertise and funds to turn around a defaulting fi rm that falls into fi nancial diffi culties mainly due to management ineffi ciency

will be able to preserve the economic value of that fi rm as well as the banks’ loan assets

OPEN INTERESTThe change will ease the pressure on banks to fi nd new buyers within 18 months, and, according to Sen, the rules should incentivise current promoters to “deleverage in the most optimum manner”. So far, several debt-laden infrastructure fi rms have begun to deleverage their balance sheets through asset sales, said Sumit Agarwal, Mumbai-based head of loan syndications at IDFC Bank.

For example, Reliance Communications, an Indian internet access and telecommunications company, is now taking steps to deleverage, including the sale of its tower business Reliance Infratel, and its non-core assets such as the undersea cable division Global Cloud Xchange [See box].

To date, several banks have invoked the SDR to convert debt to equity in a number of fi rms. The list includes Electrosteel Steels, Ankit Metal and Power, Rohit Ferro-Tech, IVRCL, Gammon India, Monnet Ispat and Energy, VISA Steel, Lanco Teesta Hydro Power, Jyoti Structures and Alok Industries, according to media reports.

IDFC Bank’s Agarwal added that lenders had resorted to invoking the SDR regime in several cases for bad loans that add up to more than Rs800 billion ($11.9 billion). Hemal H. Shah, a Mumbai-based partner in advisory services at EY, claimed banks had taken control of more than 15 troubled companies via the SDR.

But at the same time banks have found it diffi cult to fi nd ready equity buyers. According to private equity website Deal Street Asia on March 2, lenders have initiated conversations with global private equity funds and distressed asset funds, but few deals have yet been closed.

It is also too early to tell whether the SDR regime has allowed any new promoter to help a debt-laden fi rm come out of stress. “The time [allowed] for any divestment to new promoters is 18 months,” the RBI’s Sen said, meaning no bank that had invoked an SDR had yet reached the time limit for divesting its stake.

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Faced with INR140 billion ($2.1 billion) of debt maturing in March 2017,

Reliance Communications (RC) is sacrifi cing assets to deal with its obligations. The leveraged Indian internet access and telecommunications company has publically pledged to use all the money raised to reduce debts.

RC is not the only company facing debt issues in India. Many borrowed in foreign currencies to benefi t from lower interest rates, but a weaker rupee has left them struggling to pay back the debt.

Initially, RC sought to sell non-core-assets, particularly its sub-sea cable subsidiary Global Cloud Xchange, but it is now selling its towers and intra-city optic fi bre assets.

The company’s total debt was about $7 billion as of September 2015, according to a research report by Moody’s.

RC’s 2014-2015 annual report said it had currency exposure related to its revenues, expenditure and fi nancing. It said that it had signifi cant borrowings in currencies other than rupees and that it had to pay for important equipment in

foreign currencies. The report put the company’s net debt to equity ratio at 0.98 times, valuing assets at $14.6 billion, stakeholder equity at $6 billion and net debt excluding cash and cash equivalents at $5.9 billion.

One telecommunications equity analyst from an Indian bank told The Corporate Treasurer that when RC’s saving on interest costs was outweighed by the rupee’s depreciation, the company tried to refi nance its foreign currency borrowing, but it was too late as the net debt rate had risen in India so no lender was willing

to extend credit to the company.Although a spokesman

declined to comment, an offi cial inside RC disputed this claim. “[We] had no problem refi nancing loans from local banks as well. Last year, a large consortium of Indian banks refi nanced us for a loan for over a billion [US] dollars equivalent in Indian rupee.”

Either way, RC has no choice but to deleverage to combat debt. Moody’s is confi dent that the company could meet the rating targets it has set, assuming it sells its towers.

Reporting by Mark Agnew

Reliance Communications’ move to beat down its debt

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