>CORPORATE DEBT RESTRUCTURING

What and Why ??
The reorganization of a company's outstanding obligations is done by reducing the burden of debt on the company by lowering the rate paid and lengthening the time the company has to re-pay the obligation. This allows a company to increase its ability to meet the obligation. Also, some of the debt may be forgiven by creditors in exchange for equity.


The need for corporate debt restructuring arises when a company is going through financial hardship and is having difficulty meeting obligations. If the troubles pose a high risk bankruptcy, a company can negotiate with creditors to reduce such burdens and increase chances of avoiding bankruptcy. Even if creditors do not agree to the terms of the plan put forth, a court may determine that it is fair and impose such a plan on creditors.


The reorganization of outstanding obligations can be made in 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
~ Converting the unserviced portion of interest into a term loan

Borrowers’ and Lenders’ Perspectives

Borrowers’ Perspective
When a company has 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. expecting to increase profitability and thus pay off its original debt; However, the company may not be able sustain such a higher level of debt
■ Cease current operations and wind up. This would ultimately lead to the death of the company
■ “To consider a structured plan to re-negotiate the terms of its current debt with the lenders”


Lenders’ Perspective
CDR provides lenders with the opportunity to avoid being encumbered with non-performing assets.
■ The primary interest of lenders always lies in recovering the principal lent to a company along with returns on that investment – not to liquidate assets
■ Apart from this, liquidation proceedings are notorious for yielding low returns to creditors Therefore, CDR becomes an instrument for lenders, i.e. banks, to aid the transformation of otherwise non-performing assets into productive ones

CDR Analysis

Whether a case should be referred for restructuring or not is based upon a thorough examination of facts and the viability of a case. However, when the demand for restructuring is legitimate, and there is a good reason to believe that a company may be revived, it must be considered for restructuring.


A Corporate Debt Restructuring mechanism was first introduced in 2001. CDR is a voluntary, nonstatutory system that allows a financially troubled company with multiple lenders and loans of more than Rs.20 crore to restructure those loans to a plan approved by 75% or more of its lenders.


On December 31, 2011, of the 364 cases worth Rs.1.84 lakh crore referred to the CDR Cell, 230 have been approved or resolved. That's over Rs.1.42 lakh crore of debt restructured under the CDR mechanism.


Sectors more prone to CDR
Iron & Steel, Textiles, Telecoms, Fertilizers, Sugar, Cement, Petrochemicals & Refineries
New Sectors emerging for CDR
Infrastructure and NBFCs



Instances of CDR
Subhiksha Retail Bharti Shipyard
Vishal Retail ICSA
GTL Infra SuzlonEnergy
Air India GTL Ltd.
Wockhardt Kopran
India cements Koutons Retail
Jindal Steel Kingfisher Airlines
Essar Steel Nicco Corporation
HPL Rajasthan State Electricity Board
Maytas Infra Basix
Spandana Sphoorty ARSS INFRA
HCC Surya Pharma
Jindal Stainless Essar Steel



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 and 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 third quarter, up from 25 in the same period last year.


Corporate debt has spiked by over 300% this fiscal, already touching Rs.76,251 Crores, 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.


Current Trend

Surprisingly, the SBI and the HDFC Bank, two of the country’s largest lenders, have undertaken relatively little restructuring this financial year, than other banks. But private lenders are better off than PSUs in terms of NPAs as well as regarding debt restructuring.