A year ago, it looked as if asset sales were the answer to India Inc and the banking sector’s $120 billion problem, namely that of a lot of loans to country’s top-10 stressed groups going bad. The central bank’s strategic debt restructuring (SDR) focus was on getting promoters to let go of businesses and use the money to repay debt; that was also the focus of Centre’s planned bankruptcy law; to the extent possible, banks also leaned on some promoters and brokered some marriages at gun point.
Based on the results of Credit Suisse’s latest version of its ‘House of Debt’ series, this doesn’t seem to have worked, and not just because the asset sales still continue to remain muted with India Inc still kicking and screaming when it comes to asset sales. As a result, the interest-cover of these most-indebted groups – at 0.9 in FY14, it suggested defaults on the horizon – worsened further. In FY15, while the debt for these groups has continued to pile up – by an amazing seven times in 8 years – the interest cover fell to 0.8 and the debt-to-equity ratio rose from 1.9 in FY14 to 2.1 in FY15.
The numbers are far worse for individual companies. With an EBIT loss for Videocon, the interest-cover is negative, and not much better at zero for the GVK Group, 0.2 for the GMR Group and 0.6 for the Japyee Group which has also been the most aggressive when it came to asset sales in FY15. In the case of GMR Infra which sold Rs 11,000 crore worth of assets, Credit Suisse says, net debt levels are up from Rs 35,500 crore in FY14 to Rs 42,900 crore in FY15.
With a lot of debt in plants that have yet to commence operations, the ratios will worsen further – as per the rules, till a project starts operating, its debt repayment clock doesn’t start ticking. It is difficult to see who will buy these plants since, apart from the fact that India Inc is cash-strapped, with 20-70% cost overruns the capital costs are far above replacement costs. And with 30-60% of capacity still under construction, a large part of the interest (15-170% across various companies) is still being capitalized.
The problem was that, in most cases, as the debt got pared with the asset sales, so did the group’s earning capacity. The Jaypee Group will get Rs 22,000 crore from its asset sales but the plants it sold – to help bring down debt levels by a massive 30% — contributed 59% to the FY15 EBIT. In the case of Lanco, selling the Udupi plant helped reduce debt but the debt-to-EBITDA rose as the plant contributed 15% to the group’s debt but accounted for 69% of FY15 EBITDA.
More frightening, especially for the banks that will be left carrying the can at the end of the day, the number of defaults by these companies are rising over the past year – auditor reports have given instances of 8 of these ‘House of Debt’ groups delaying payments for more than 90 days on loans that amount to around 15% of their debt. For four of the groups – Jaypee, Lanco, Essar and GMR – between 40 and 65% of the debt has already been downgraded to ‘D’ or default status by the rating agencies. The number is the highest at 65% for Jaypee and the lowest at 38% for Lanco.
Once you include the part of debt that is in overseas loans and being pummeled by every fall in the value of the rupee, Credit Suisse estimates that 20-90% of the debt of these groups – $48bn in terms of value is now facing severe stress. Once you include this, the total stressed loans of the banking system are a whopping 17% – not surprisingly, Credit Suisse prefers consumer lenders over corporate lenders.