The Hindu : New beneficial tool for corporate restructuring

Online edition of India's National Newspaper
Saturday, Feb 08, 2003

Business

Business - News Analysis

New beneficial tool for corporate restructuring

By C. R. L. Narasimhan

In the highly surcharged atmosphere characterised by rising concerns over NPAs on the one hand and the conferment of unprecedented powers on the lenders, the corporate debt restructuring scheme appears to be an excellent via media.

Three steel companies, Essar Steel, Jindal Vijaynagar Steel and Ispat Industries, groaning under a huge burden of institutional borrowing get a reprieve by going through an officially blessed, relatively new restructuring tool called the corporate debt restructuring arrangement (CDR). The success of CDR depends on the active co-operation of the two parties, the lenders and the borrowers. In fact, there are certain well-defined rules of the game and only by following those both at the discussion (negotiation) stage and at the post-agreement stage can a CDR fructify. There are important similarities between CDR and the alternative disputes resolution now being popularised to reduce the burden on courts. In both the contending parties agree not to seek the conventional judicial remedies at least for a while.

It is perhaps no coincidence that the first restructuring under the new scheme has taken off at a time the lending banks and institutions acquired unprecedented legal powers (in the form of the Securitisation law) to proceed against defaulting borrowers.

Despite the exaggerated claims of certain banks, the real benefit to the lenders in these early days from the new law may well be the creation of a proper climate to recover their dues. Simultaneously, the arguments in favour of alternative methods such as CDR are becoming stronger.

The advantages of a CDR are apparent from the steel companies' restructuring package, details of which became public on January 20. The restructuring has involved some Rs. 20, 000 crores of their collective liabilities and will come into effect after their respective boards and those of the banks/institutions ratify.

Briefly, the CDR for the steel companies has involved the following stages:

(a) Writing down of the borrowers' equity (by about 40 per cent) (b) Conversion of a portion of their debt into equity by the institutions. After this, their shareholding in the company will almost equal that of the borrower (c) 40 per cent of the remaining debt will be converted into foreign currency while the remaining 60 per cent will remain as rupee debt having a fixed interest cost of 14 per cent. As foreign currency rates are low, the average cost of borrowing will come down to 11.6 per cent and that too on a smaller amount. The debt will be repaid within 15 years and will be secured by various personal and corporate guarantees.

(d) A separate account, called the Trust and Retention account, is to be opened into which the revenues of all these companies will flow. The lenders will monitor the inflows with a view to securing their dues as per the agreed schedule.

Both the lenders and the borrowers stand to gain. V. G. Raghavan, the CFO of Essar Steel, says that through CDR it is possible to restructure without the lenders having to sacrifice as much as they would in other cases of restructuring. In other words CDR can result in a win-win situation for all. The financial system gains because several new concepts are being tried out for the first time. For instance, the concept of priority debt in addition to the trust and retention mechanism.

The former will enable the company to buy back unsecured debt at a substantial discount. Through the CDR it has been possible to match the liabilities with the cash flows that are improving in the wake of a global upturn for the steel companies. The steel companies have a natural hedge against exchange fluctuation through their income stream from exports. The company's balance sheet improves because the level of debt comes down while net worth goes up. The company also gets an extension in loan repayment till 2017, has its compound interest converted into zero coupon bonds and penal interest on the loans has been waived. Given the much better outlook for the steel industry, Mr. Raghavan foresees no major difficulty in sticking to the revised dates.

The lenders are able to charge above market interest rates on loans that (post - CDR) have become much better risks. On rupee term loan, it is 14 per cent and on foreign currency loans 8 per cent. The lenders also get better security through the Trust and Retention account, increase pledge of shareholding by the promoters and increase equity holding in the company. Evidently, there is a strong case for publicising the CDR scheme well beyond banking circles. Writing for the Hindu Survey of Industry 2003, P. S. V. Chari and P. S. Narasimhan say that the objective of the corporate debt-restructuring scheme is to ensure a timely and transparent mechanism for restructuring. The CDR can cover all multiple banking arrangements with an outstanding exposure of Rs. 20 crores or over.

A definite timetable is laid down and all the parties will have to adhere to it.

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