A Presentation On
Corporate Debt Restructuring Mechanism
By
CA Rajesh Chaturvedi
February 4 , 2012
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What is CDR
� Corporate Debt Restructuring is basically a mechanism by way ofwhich company endeavors to reorganize its outstandingobligations.
� The reorganization of the outstanding obligations can be made byany 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
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Why CDR
When a corporate is having severe financial crisis interms of :
� Trouble in repaying it’s debt obligation� Inability in timely servicing of it’s interest
It generally resorts to Corporate Debt RestructuringMechanism
CDR – Borrower’s Point of View
When a company is having outstanding debts whichcannot be serviced under its existing operations it canresort to any of the following courses of action:
� Enhance its quantum of Debt with an expectation toincrease its Profitability & to pay off its original debt,however the company may not be able sustain suchenhanced level of debt
� Cease the current operations of the company & undergowinding up, so this will ultimately lead to unnaturaldeath of company
� “To consider a structured plan to re –negotiate the termsof its current debt with existing lenders itself”
This is where restructuring gains prominence.4
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CDR- Lender’s perspective
� CDR gives the lenders a unique opportunity toavoid being encumbered with NPA’s.
� The primary interest of lenders always lies inrecovering the principle amount lent to corporatealong with returns on that investment & not inliquidation of assets
� Apart from this Liquidation proceedings arenotorious for yielding low returns for creditors
Therefore, CDR becomes an instrument for thelenders, i.e. the banks, to aid the transformation ofotherwise Non-Performing Assets into productiveassets
CDR – Is it legitimate in every case
Whether a case should be referred for restructuring ornot is based upon thorough examination of facts &viability of the case.
However, wherever the demand for restructuring islegitimate, and there is a good reason to believe thatthe corporation may be revived, it must be consideredfor restructuring.
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Objectives of CDR
� By way of CDR there is a hope of preservation ofViable corporate that are affected by certaininternal & external factors
� CDR aims at minimising the losses to creditors &other stakeholders through an orderly & co-ordinates restructuring programme
� To support continuing economic recovery
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CDR StructureThe CDR structure in India is based upon the three tier structure as follows:
CDR CELL
•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 thelenders
Empowered Group
•This group is comprised of the ED level representatives of leading banks alongwith ED level representatives of concerned lenders
•This group based upon preliminary report prepared by CDR cell decides whetherthey should take up the restructuring or not, if yes then they provide initialguidelines
• When final restructuring plan is prepared by CDR cell the same is again approved by EG
•This is the top tier in CDR mechanism comprised of representatives of all thefinancial institutions & banks.
•This body lays down the policies & guidelines to be followed by the EG & CDRcell for debt restructuring
Standing Forum
Legal Basis to CDRThe 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 requiredto enter into the legally binding ICA with necessary enforcement andpenal provisions, if 75% of creditors (by value) agree to a debtrestructuring package, the same would be binding on the remainingcreditors.
� DCA: Debtors are required to execute the DCA. The DCA has a legallybinding ‘stand still’ agreement binding for 90/180 days whereby boththe debtor and creditor(s) agree to ‘stand still’ and commit themselvesnot to take recourse to any legal action during the period.
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Certain Instances of CDRIn the past, there have been several companies which have beenreferred to CDR, few of them are as follows:
� Subhiksha Retail� Vishal Retail� GTL Infra� Air India� Wockhardt� India cements� Jindal Steel� Essar Steel� HPL
Accounts classification under CDR system
Standard & Substandard
AccountsCategory 1
CDR System
Additional funding can
be provided
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Doubtful Accounts Category 2
CDR System
NO Additional
funding can be
provided
RBI Guidelines for restructured Account
� The dues to the bank are ‘fully secured by tangible security’ (notapplicable in the infrastructure projects, provided the cash flowsgenerated from these projects are adequate & escrow mechanismavailable).
� The unit becomes viable in 10 years, if it is engaged in infrastructureactivities and in 7 years in the case of other units.
� The repayment period of the restructured advance includingmoratorium period doesn’t not exceed 15 years in the case ofinfrastructure advances and 10 years in the case of other advances.
� Promoter’s sacrifice and additional funds brought by them should beminimum of 15% of the banks’ sacrifice.
� Personal Guarantee is offered by the promoter except when the unit isaffected by the external factors pertaining to the economy andindustry,
� The restructuring under consideration is not a repeated restructuring12
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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 eithervoluntarily or at the end of the restructuring period.
� Performance: If the performance of the borrower in any wholefinancial year improves in comparison to CDR projections.
� Declaration of dividend: If the borrower declares dividend in anyfinancial year in excess of ten percent on annualised basis. Therecompense amount shall be payable prior to distribution ofdividend.
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Exit & Recompense Clause
Methodology:
� On the occurrence of any of the trigger events, thereferring/monitoring institution shall convene a meeting of theMonitoring Committee to determine the quantum of the recompenseamount payable by the borrower till the trigger date.
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
12. Payment Parity.
6. Borrower Classification forstipulation of Standard Terms &Conditions
13. TRA: Treatment For Interest on WC and Term Loan (TL/WCTL/FITL)-Treatment in TRA.
7. Time Frame for Processing andImplementation of RestructuringSchemes.
14. Prudential & Accounting Issues
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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.
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Certain Case studies
Case Study -1
KSL & Industries Ltd.
� KSL Industries Ltd. (KSLIL) is the flagship companyof Saurabh Tayal Enterprise (ex-major stake holder ofBank of Rajasthan)
� KSLIL is a Mumbai based conglomerate engaged inIndia’s fastest growing industries i.e. Textile & realestate
� Company is having spinning facility, knitting facility& processing facility in the various parts of thecountry i..e at Nagpur, Dombivali & Wada.
� KSLIL embarked an expansion project at it’s unitslocated at Kalmeshwar & Nagpur after due appraisalin the FY 2010 & 2011
Snapshot of the company
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
Increasing in cost causing reduction
in profits
Deficit in cash flow
Inadequate working capital
Affecting the business volumes
Why CDR for KSLIL
As explained before company had undertaken an expansion projectin FY 2010 & 2011, however during the project implementation thetextile industry underwent major change causing a major deviation inthe assumptions envisaged during project appraisal & presentscenario 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 butcommensurate increase in the income was not reflected causing asignificant gap in the profit envisaged & actual profits earned
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 notsustainable in prevailing circumstances
Other Reasons for deterioration of financial position
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)
Cash flow Analysis
� Exhaustive restructuring plan is to be prepared to revive theoperations & profitability .
� Certain modifications and up gradation to the machineriesto improve production and productivity, these will entailsaving in labour cost & other overhead cost
Management Initiatives & Business plan
Till the time of designing & implementation of restructuringfollowing 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 / chequedeposits made in the KSL’s accounts, would be allowed to bewithdrawn, without any adjustment against any dues payableto the bank.
Debt realignment proposal (Holding on operations)
1. Term loans:
� Repayable in 10 years
� No moratorium period available in order to comply withsubsidy 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 loansto be converted into Funded interest term loan
� Repayable in 2 years starting from 30th 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 ofrestructuring
� Reduced coupon rate @2%
� Yield to maturity of 4%
Debt realignment proposal
5. Promoter’s Contribution:
� Promoter’s to infuse fresh contribution to the extentof 15% of lenders sacrifice
� 50% of the same to be infused immediately &remaining within 6 months
Debt realignment proposal
Post approval of restructuring scheme and subject to timelyavailability of adequate working capital can generate decentRevenue and EBIDTA levels sufficient to meet the debtservicing requirements post restructuring.
Post debt restructuring scheme
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%
The above projections are fully sensitized for furtherdownside risks, so it is very much likely that afterimplementation of the package the company will able torestore its old shape.
The restructuring package is expected to act as a breather forthe company.
Post debt restructuring scheme
Kingfisher Airlines
Case study -2
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Kingfisher’s Debt recast packageIf 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% compulsorilyconvertible preference shares which thereafter converted into equity
� Rs. 553.10 Crores of Loans were converted into 8% CumulativeRedeemable preference Shares redeemable at par after 12 years.
� Repayment of the balance loans was rescheduled with a moratoriumon repayment of principal of 2 years and step-up repayment over thesubsequent 7 years
� Interest for the period July 1, 2010 to March 31, 2011 on loans fromthe banks was converted into a funded interest term loan repayablein 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 non-fund based facilities of Rs.444.40 Crores sanctioned by the banks
� Part of the working capital limits of Rs.297.40 crores converted intoworking capital term loans.
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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 cumulativeredeemable preference shares
• Reduces the interest burden,dividend is payable to shareholdersonly 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
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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
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CDR Mechanism – Concluding remark
The CDR mechanism attempts to be a one-stop forum forlenders and creditors to arrive at mutually agreeable terms tosecure their interests, however varied they may be. With theinvolvement of multiple lenders, there is every chance thatany restructuring process would face obstacles and time-delays. These are the very problems that the RBI’s informalCDR system aims to address by setting up a framework forswift and timely action.
Thank You