A Presentation On

Corporate Debt Restructuring Mechanism

By CA Rajesh Chaturvedi

February 4 , 2012

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 Converting unserviced portion of interest into term loan
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Why CDR
When a corporate is having severe financial crisis in terms of : Trouble in repaying its debt obligation Inability in timely servicing of its interest It generally resorts to Corporate Debt Restructuring Mechanism

CDR Borrowers 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 4 This is where restructuring gains prominence.

CDR- Lenders perspective

CDR gives the lenders a unique opportunity to avoid being encumbered with NPAs. 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 assets
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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 & coordinates restructuring programme To support continuing economic recovery

CDR Structure
The CDR structure in India is based upon the three tier structure as follows:
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 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
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CDR CELL

Empowered Group

Standing Forum

Legal Basis to CDR

The legal basis to the CDR System is provided by the DebtorCreditor Agreement (DCA) and the Inter-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.

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

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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 provided

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RBI 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 doesnt not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. Promoters 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, 12 The restructuring under consideration is not a repeated restructuring

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.

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Points to be considered while preparing restructuring package

S.No. Particulars
1. 2. Entry into CDR System. Financial Viability Parameters : Benchmark Levels i.e. BEP, RoCE, IRR, Cost of capital & Loan life ratio Category 1 & 2 under CDR System. BIFR Cases; Eligibility Criteria. Cases of Willful Benchmark Levels Defaulters:

S.No.
8. 9..

Particulars
Monitoring Mechanism. Sharing of Securities.

3. 4. 5. 6.

10. 11. 12. 13.

Conversion of Debt/Sacrifices in to Equity. Additional Finance and sharing thereof. Payment Parity. TRA: Treatment For Interest on WC and Term Loan (TL/WCTL/FITL)Treatment in TRA. Prudential & Accounting Issues
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Borrower Classification for stipulation of Standard Terms & Conditions Time Frame for Processing and Implementation of Restructuring Schemes.

7.

14.

Points to be considered while preparing restructuring package

S.No. Particulars
15 16. 17. Prepayment of Restructured Debt and Exit From CDR System. Recompense Clause. OTS/ Assignment of Debts.

S.No.
18. 19. 20.

Particulars
Revocation of Restructuring scheme/ Legal action for recovery. Re-workout of CDR Packages. Exit Cases From CDR System.

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Certain Case studies

Case Study -1

KSL & Industries Ltd.

Snapshot of the company

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 Indias 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 its units located at Kalmeshwar & Nagpur after due appraisal in the FY 2010 & 2011

Current Financial performance

Particulars Sales EBIDTA % EBIDTA Interest PBT PAT Cash Accruals Long term Debts FY 09
819 158 19.3% 57 30 24.37 96.64 860.27

FY 10
1031 157 15.2% 73 (4.4) 4.00 94.09 897.28

FY 11
1306 187 14.3% 86 2.1 -3.42 96.07 867.02

FY 12 (H1)
740 121 16.3% 64 8.0 6.38 56.61 839.38

Why CDR for KSLIL

Increasing in cost causing reduction in profits

Affecting the business volumes

Deficit in cash flow

Inadequate working capital

Reasons for deterioration of financial position

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

Other 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

Cash flow Analysis

Particulars EBIDTA Less Tax Net Current Assets Suplus Post NCA built up Capex Surplus after Capex Interest Obligation Principal Obligation Total Debt Obligation Surplus/(deficit) post debt servicing FY10 158 (20) 178 147 32 73 89 162 (130) FY11 186 43 143 24 118 86 34 120 (2) HFY-12 120 22 98 3 95 63 35 99 (4) Total 464 45 419 174 245 222 159 381 (136)

Management Initiatives & Business plan

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

Debt realignment proposal (Holding on operations)

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 KSLs accounts, would be allowed to be withdrawn, without any adjustment against any dues payable to the bank.

Debt realignment proposal

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

Debt realignment proposal

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 30th June 2015 Interest on FITL to be charged @5%
4.

Foreign Currency convertible Bonds(FCCBs):

25% of the FCCB amount to be paid within 6 months of restructuring Reduced coupon rate @2% Yield to maturity of 4%

Debt realignment proposal

5.

Promoters Contribution:

Promoters 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 debt restructuring scheme

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.
Financial Year Total Revenues EBIDTA EBIDTA % FY12-H2 606 33 5.4% FY13 1320 80 6.1% FY14 1338 94 7.0% FY 15 onwards 1360 118 8.7%

Post debt restructuring scheme

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.

Case study -2 Kingfisher Airlines

Kingfishers Debt recast package

If we look at the books of Kingfisher, banks & FIs 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 nonfund based facilities of Rs.444.40 Crores sanctioned by the banks Part of the working capital limits of Rs.297.40 crores converted into working capital term loans.
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Analysis of the debt recast package

Action Taken 1. Conversion of loan into equity Impact upon company Reduction of interest burden

2 Conversion of loan into cumulative Reduces the interest burden, redeemable preference shares 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

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Analysis of the debt recast package

Action Taken 4. Conversion of unserviced portion of interest into term loan 5. Reduction in Rate of interest 6. Additional limits sanctioned Impact upon company Reduces the penal interest liability Reduces the cash outflow in terms of interest Will help the company to manage its operational expenses till the time it gets stabilised 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 capital
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7. Working capital limit converted into Working capital term loan

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 timedelays. These are the very problems that the RBIs informal CDR system aims to address by setting up a framework for swift and timely action.

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Thank You