PSU banks SEB restructuring: On expected lines; some clarity still needed:: Prabhudas Lilladher,

The CCEA has finally approved the scheme for Financial Restructuring of Discoms
and is in line with the recommendations made by the BK Chaturvedi committee.
We estimate that the transfer of ~50% debt to State Government would reduce
losses and per unit gap in some states by ~15‐25%. However, we believe that strict
implementation of tariff hikes and T&D loss reduction will be the key. The package
is positive for PFC/REC as debt‐servicing of SEBs will improve without substantial
restructuring for PFC/REC. For PSU Banks, restructuring is positive but market
expectations was never on outright NPAs from their SEB exposure but NPV hits
which we still are not able to ascertain, given the limited details available.

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􀂄 Salient features of the Restructuring Package: (1) 50% of outstanding ST loans
to be taken over by the State Govt in next 2-5yrs and in the interim, will be
funded by bonds issued by SEBs but guaranteed and serviced by State Govt. (2)
Restructuring the balance 50% debt by banks – Committee recommended
extending tenure to 7-10yrs with a 3-yr moratorium (3) Central Govt. to provide
incentive of ~25% of principal repayment of the loans taken over by State + T&D
loss reduction linked incentives. The committee also recommended a 3‐yr
transitional finance mechanism to bridge revenue gap in the near term.
􀂄 What does it do to SEB Finance, especially the larger loss‐making ones? Though
the acceptance of the package depends upon the State Govts., for the accepting
states, we believe ~50% lower debt-servicing (taken over by State Govt) will
reduce commercial losses by ~15-25%, especially in the high loss-making states.
Over the last 1-2yrs, contribution of interest expenses has inched up to ~30‐60%
of total losses in some of these states. The Rs1.0‐1.5/unit Revenue/Cost gap
(FY10) takes into consideration interest cost of Rs0.5‐0.7/unit per unit and thus,
transfer of debt-servicing will lower the revenue/cost gap by ~20‐25%.
􀂄 Still need clarity to access final impact on banks: Though the mechanism of debt
transfers from SEBs to State Govts. have been laid out, we are still unclear about
(1) Interest rate on bonds issued by SEBs in the interim – This could have NPV
impact for banks as bonds may carry an interest rate of <9-10 11-12="11-12" p="p" s="s" v="v">interest rate on SEB loans and (2) After transfer of debt, will banks need to hold
the special securities issued and at what rate?
􀂄 What it means for Banks and PFC/REC: Banks have largely funded SEB losses
through short-term loans and carry bulk of the short-term debt of SEBs, whereas
PFC/REC have ~Rs50bn of short-term debt only. As the restructuring package
positively impacts SEB’s debt-servicing, it is positive for PFC/REC as their
involvement in the restructuring will be limited, given low ST debt. For PSU
Banks, restructuring is positive but the market expectations was never on
outright NPAs from their SEB exposure but on NPV hits which we still are not
able to ascertain, given the limited details available. Among our coverage PSU
banks, SBI has the least SEB exposure at <2 and="and" bob="bob" have="have" nion="nion" p="p">exposure. Indian/OBC and Central Bank (uncovered) have high SEB exposures.