A Presentation On
Corporate Debt Restructuring
Mechanism
By
CA Rajesh Chaturvedi
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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
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
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”
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
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
.
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 &
co-ordinates restructuring programme
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CDR Structure
The 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 the lenders
Empowered Group
•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
•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
Standing Forum
Legal Basis to CDR
The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-Debtor-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.
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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
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 providedRBI 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,
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.
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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.
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 for stipulation of Standard Terms & Conditions
13. TRA: Treatment For Interest on WC and Term Loan (TL/WCTL/FITL)-Treatment in TRA.
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.
Case Study -1
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
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 56.61Increasing in cost causing reduction
in profits
Deficit in cash flow
Inadequate working capital
Affecting the business volumes
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
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
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)
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
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 (Holding on
operations)
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
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
thJune 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%
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 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.
Post debt restructuring scheme
Financial Year FY12-H2 FY13 FY14 FY 15 onwards
Total Revenues 606 1320 1338 1360
EBIDTA 33 80 94 118
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.
Kingfisher Airlines
Case study -2
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
non-fund based facilities of Rs.444.40 Crores sanctioned by the banks
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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 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
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
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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 time-delays. 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.
