Not enough asset sales are taking place
Going by the increasing number of companies queuing up at the doors of the Corporate Debt Restructuring (CDR) cell, the strain on banks’ balance sheets doesn’t seem to be easing. Although bankers haven’t yet cleared the R11,500 crore loan recast proposal for ABG Shipyard, the CDR cell on Friday approved easier repayment terms for a loan of R2,866 crore to Orchid Chemicals and Pharmaceuticals. Increasing quantum of restructured loans on their books hurt banks to the extent these assets attract higher provisioning; moreover capital is blocked in businesses that may not turn the corner.
While banks have only themselves to blame for the stress on their books, the good news is that more companies are letting go of assets to free up cash and service their debt. Joining the list of such companies is Orchid, which will sell its penicillin plant to Hospira for $200 million. A study by Standard Chartered shows that Indian corporates have sold assets—both core and peripheral—worth around R55,000 crore over the past 12-18 months which is roughly 13% of their debt. That might not seem meaningful given the collective debt-to-ebitda for the groups that sold the assets remains a high 8.9 times, not much lower than the 10.1 before the sales. Essar Steel, for example, has a total outstanding debt of R36,000 crore but earned a core ebitda of R1,106 crore in FY13. Also, not all promoters seem to be serious about shedding debt because two groups account for more than half the value of assets sold in the last one year—Jaypee Group’s two hydro power plants fetched it R10,500 crore while the sale of Videocon’s oil assets brought $2.5 billion. The same study estimates that assets worth around 12% of debt are on the block, noting the pace of sales could pick up in the next 12 months.
One reason for the small number of assets being sold is that promoters are still not under enough pressure to take a larger haircut—if the haircut is big enough, it is difficult to imagine there wouldn’t be enough buyers for the assets. Banks need to pressure many more promoters to sell businesses by setting deadlines for such sales. They have, for far too long, caved in to demands for refinancing—at times without the promoter even bringing in a contribution that would take care of short-term loans. Moreover, until RBI tightened the norms for restructuring companies—mandating a personal guarantee from the promoters—they were recasting loans on extremely lenient terms. While bank-specific details are not available, in several cases, banks have guaranteed dollar loans of borrowers—while this has allowed borrowers to repay part of their loans to banks, the banks still bear the risk of the firms defaulting on their foreign loans. It’s high time they stopped taking on so much of the load and asked companies to do their bit.