CDR & Stakeholders

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Signs of companies opting for CDR

Rapid market changes, keen competition, disruptive technologies, strategic errors, Lack of policy decision from government – any or all of these could lead to serious financial distress for a company. And companies often exhibit symptoms of distress well before a crisis erupts. Early detection helps investors avoid huge losses.

We recommend that every investor read the annual report before making any investment decision. Don’t take a risk but balance the trade-off between risk and reward.

If this is a situation of a company, then it is inching towards CDR:

~ Declining earnings

~ Poor liquidity / cash-flow problem

~ Excessive debt / over-leveraged

~ In breach of covenants / potentially breaching covenants

~Credit-rating downgrade

~Debt trading at “distressed” levels

Companies struggling with high debt

Everyone agrees that India needs infrastructure such as roads and utilities and such companies are better positioned because of their experience. But the debt they have accumulated over the years is an albatross around their necks.

When the infrastructure fad was running its course, companies more than tripled their debt, bidding for projects much bigger than what their equity could support. Indiscriminate lending by banks, prodded by the government, is back to haunt these companies as most lenders have hit their limits and are staring at defaults.

A few recent reports highlighted more than two dozen highly-leveraged large borrowers, including Adani Power, Essar Oil, Tata Communications, Electrotherm India and Jai Balaji, many of which may require future debt-restructuring.

Lanco, a power producer and contractor, recently defaulted on a Rs.90-crore payment to banks. In the five years between 2007 and 2011, the debt of GMR Infra, which operates the New Delhi airport, jumped 6.7 times. BGR Energy and IVRCL, a contractor for road and water projects, had a 5.4-fold jump in its debt. GVK Power, which runs the Mumbai airport, saw its debt climb 3.59 times in the same period. Jaypee Infratech, which built India's only Formula 1 race track in a New Delhi suburb, had its debt soar 31 times in three years from Rs.200 crore in fiscal 2008.Hotel Leela Venture increased its debt almost four times from 2007.

Many are headed for debt restructuring where lenders may impose strict conditions and dilute equity. That could hurt stockholders' interests.

Ultimately, the lender is the worst affected

A report from Standard & Poor’s talked about Indian bank’s weaker asset quality and earnings across the sector in 2012, with credit growth predicted to fall to 16%, from 23% the year before.

India’s banks weakening asset quality is also clear from the marked rise in debt restructuring agreements, a halfway house between payment & default used by the banks for struggling businesses such as Kingfisher Airlines. Taken together, HCC’s mix of bad and restructured loans rose to 4.3% of overall lending in the 3^rd quarter, up from 25 in the same period last year.

Corporate debt has spiked by over 300% this fiscal, already touching Rs.76, 251 crore, against Rs.25, 054 crore in the previous fiscal. This brings the overall CDR assets in the system to over Rs.1.9 lakh crore. This is alarming.

Credit rating agency Standard & Poor’s, in a recent conference call with the media, said that restructured loans were expected to increase to around 4% of advances (of the banking system) at this financial year- end, from 2.6% a year ago. In 2012-13, restructured loans are expected to be 4-5% of advances. The S&P analyst also said that 25-50% of restructured loans may slip into NPAs.

In the April-June quarter of 2011-12, the cell received 16 corporate restructuring cases with debt of Rs.4,682 crore. In the July-September quarter, it  received 19 cases (with debt of Rs.23,071 crore); in the October-December quarter, 25 cases (Rs 22,497 crore); and in the January-March quarter, 23 cases (Rs 26,001 crore).  Corporate sickness seems to be spreading. Earlier, an average bank would have not more than 3-4 corporate debt restructuring cases at a time. But now an average bank deals with about 30 cases.

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