December 4, 2017

Willing to take bigger haircuts of 50-60% rather than risk the firm being liquidated

Banks are veering around to the view it might be better to clinch one-time settlements (OTS) with defaulting companies — on the Reserve Bank of India’s second list — and take haircuts of 50-60% rather than face uncertainty in the courts. Since several companies on the list have not attracted bids and the December 31 deadline is drawing near, the chances of them being liquidated are high, bankers explained.

Bankers FE spoke to said that less than a fourth of the firms on the second list have attracted resolution plans; even fewer have submitted a viable debt restructuring proposal.  Consequently, lenders were working on such settlements with promoters so as to avoid taking their companies to the National Company Law Tribunal (NCLT), senior bankers told FE. “They feel it is better to take a hit and move on rather than provide large sums in their books,” a banker explained. He added that the possibility of adverse outcomes from the NCLT was prompting to opt for settlements even if the haircuts were large.

These companies are all on the second list of defaulting firms put out by the RBI.  Banks have also put on sale some mid-sized companies, and offered these to asset reconstruction companies (ARCs). To enable OTS, promoters have been asked to pay up a portion of their loans before December 13 as that would help prevent insolvency proceedings. Should a borrower not be able to bring in the required sum within the deadline, he would have the option of signing an undertaking promising to arrange the money within six months.

The possibility the NCLT might give an unfavourable ruling, bankers said, have made many lenders apprehensive of approaching the court. In the case of Synergies Dooray Automotive, the Hyderabad NCLT approved a debt resolution plan that envisages a 94% haircut for its lenders. Challenging the order, Edelweiss ARC had approached the National Company Law Appellate Tribunal ( Edelweiss ARC).

Rajnish Kumar, chairman, State Bank of India (SBI), recently told reporters that while some haircut was inevitable it should not be very steep. “I don’t mind some haircut, but I don’t want to go bald,” Kumar had observed. Meanwhile, banks have approached ARCs to sell the troubled loans but have sought a larger portion of cash and smaller portion as security receipts than currently mandated. “Several companies on the second list have not yet been able to attract bidders. So, even if we go to the NCLT, we will end up liquidating the asset at less than the true value,” a banker said. He added that any settlement based on the liquidation value would entail steeper haircuts than the OTS scheme or ARC sales.

Siby Antony, chairman, Edelweiss ARC, believes that sales of distressed firms to ARCs may be an effective way out for banks. “Wherever banks feel there will not be competitive bidding from external sources, reference to the NCLT may prove costly,” Antony said. In August, the RBI had sent lenders a second list of 28 stressed assets to be referred to the NCLT by December 31. The central bank allowed banks to make “adequate” provisions for such accounts by March 2018. The new list, bankers said, includes Videocon Industries (gross debt of Rs 47,554 crore), IVRCL (Rs 3,579 crore), Uttam Galva Steels (Rs 5,041 crore), Soma Enterprises (Rs 1,895 crore) and Asian Colour Coated Ispat (Rs 3,019 crore). The RBI had asked banks to try and come up with workable solutions for the stressed exposures by December 13.
Meanwhile, of the 12 companies on the RBI’s first list, 11 have been admitted by NCLT benches. Jyoti Structures, the first to be admitted under the IBC in July, will run out of the six-month moratorium time in January 2018 and is expected to seek a three-month extension till April.

[The Financial Express]