If banks are to survive, some promoters must fold up
If there is one lesson from last year’s round of asset sales, it is that they are not taking place fast enough, that India Inc is still resisting the banks’ pressure to sell, perhaps looking for a better value. That is why, as Credit Suisse’s third version of its House of Debt series shows, debt ratios continue to worsen. While overall debt of 10 corporate groups has risen seven times in 8 years, the interest cover – ebit-to-interest – has fallen from 0.9 in FY14 to 0.8 in FY15, indicating more defaults can be expected to take place over the year; worse, a large share of this debt is falling due over the next 12 months. Indeed, anywhere between 40-65% of the $120bn debt of these top 10 stressed corporate – this accounts for 12% of bank loans – has already been downgraded to D, for default, with the ratio at 65% for the Jaypee Group and 38% for Lanco. Getting promoters to sell assets to retire debt, of course, has been the central bank’s main focus – tillRaghuram Rajan became RBI Governor, it has to be acknowledged, nowhere near this kind of attention was paid to cleaning up banks – but as the data shows, this may not be good enough. More so since, in most of the cases where large assets were sold to retire debt, this also dramatically lowered the group’s earning potential – the Udupi power plant, for instance, contributed to 15% of Lanco’s debt but to 69% of its ebitda.
The numbers differ from one group to another – the interest cover is negative for Videocon, zero for the GVK Group and a mere 0.2 for the GMR Group – and, by all accounts are set to worsen dramatically. That is why mere asset sales of the type going on right now are not going to help, more so since in many sales, it was one indebted group buying out the assets of another indebted group. In its last report, Credit Suisse had thought 2014 would be the year of reckoning since that was when a large amount of capacity was to come on stream – by the rules, the debt-repayment clock doesn’t start ticking till then. While much of that capacity got delayed, with huge cost overruns of anywhere between 20 and 70%, many of these projects are now at beyond replacement costs. At these costs it is not clear why promoters would be interested in completing them – that is why the number of stalled projects is once again rising, and the fall in commodity prices is making the value equation more adverse. With just that many buyers, at least when it comes to established Indian businesses, it is not clear how many of these assets can be bought, even if sold at discounts. So, unless some promoters are forced to make way for new promoters, several banks could also be in big trouble – this is more the government’s call than the RBI’s. As far as India Inc is concerned, it also means the next few years will be those of repairing balance sheets, not making large investments.