Restructuring / Distressed Debt Opportunities in Trading Indian Scenario by Sajeve Deora MD, Integrated Capital Services Ltd. at Vienna April 2008 1
Distressed Debt History 70 s Liquidation under Companies Law as means of recovery. Liquidation proceedings carried out by High Courts Apex Court in each State. Liquidation process fraught with delays. 80 s Entry norms for foreign capital are eased. Private Sector is offered greater role. Changing composition of labor from farm to industry raises need for protection. Large import of technology and capital goods exposes economy to cyclic stresses. 2
Distressed Debt History Rising interest rate and weakening Rupee expected to erode repayment capability. Lending is recourse based. Capital, Industry and Labour require protection. Sick Industrial Companies law passed to set up a Board for Reconstruction (BIFR). Industrial enterprises and guarantors before BIFR eligible for protection from recovery measures. Reserve Bank lays down guidelines to be followed by banks for restructuring of debt. Government lays out policies to provide framework to deal with sick enterprises. 3
Distressed Debt Changing Orientation 90 s Doubtful debt provisioning sets in. Balance Sheets of banks show fractures. Recovery efforts of banks against industrial enterprises faced with BIFR s protection. Recovery of Debt law passed and Recovery Tribunals are set up. BIFR competent to permit to banks to initiate recovery measures against erring. 4
Distressed Debt Changing Orientation 2000 onwards Banks permitted to lend against real estate. Land values start moving up. Change of land use offers opportunities in asset stripping, a new class of recovery. Lenders willing to trade in distress debt / control the process of liquidating assets. Securitization and Enforcement of Security Interest law passed. Reserve Bank permits banks to trade stressed assets and setting up of Asset Restructuring Companies. Parking On-the-fence eases 5
Distressed Debt Changing Orientation Manufacturing looks up and capital market improves. Significant recovery from industrial sickness. Deep restructuring plans carry recompense obligations on borrowers. 6
Trading in Stressed Assets Banks and approved financial intermediaries (Asset Restructuring companies ARC and Nonbanking Financial companies - NBFC) permitted to trade Loan portfolio Assignment of: Debt and security with recourses Tender based Pledge of owner management stock Equity portfolio Investment grade Right of first refusal of sitting management Tender based 7
Trading in Stressed Assets Payment mechanism Cash and / or Security receipts (expected to be tradable) Legal recognition Nominal stamp duty is chargeable Charge of acquirer over assets is recognized by Registrar Acquirer steps in shoes of seller, including legal actions Further trading / assignment After lock-in of 18 months 8
Trading in Stressed Assets Owner managements often bring new debt holders to table, and restructure. Banks prefer to take co-operation of owner managements to avert delay / litigation. Fiscal benefits pending collection by Authorities are auctioned NPV basis. Resolution Agents, a new class of intermediaries. 9
Challenges to Recovery from Stressed Assets Appropriation of cash flow realized from holding-on operations. All lenders may not provide funds for holding-on operations, asset maintenance. Recovery measures in case of consortium financing require super majority. Small value / 2nd / residuary charge holders become difficult to deal. Settlements with stakeholder/s outside the main settlement accelerate recovery. The acquirer has to be swift, and mobilize opinion with other lenders. 10
Challenges to Recovery from Stressed Assets Liabilities towards workmen and taxes can negate recovery efforts. Asset quality / quantity deteriorates if the person in possession is irresponsible. Deep payment plans linked to free cash flow continue to be exposed to same risks. Settlement for cash / stock / dispossessed collateral is the preferred way. Legal processes can delay actions / recovery. Process to change management does not yield if sitting management is hostile. Experience of rating agencies is limited. 11
Changes Ahead Multiple forums exist for restructuring of debts BIFR, Sick Companies law Companies law, Voluntary Restructuring / Liquidation Recovery Tribunals Securitization law Rehabilitates industry, protects workmen / debt holders Implements restructuring to achieve going concern status / asset sale to pay creditors Sell assets, enforce recovery, pay security holders Enables security interest holders to sell assets, recover Debt instruments, having cross border implications, call piece by piece dealing. Emerging complexity of corporate structures demands wider set of skills. Internationalization of businesses will lead to a need for networked consultants. 12
Changes Ahead Company law Tribunal to consolidate possibilities before BIFR & Companies law. Legal decisions are defining the processes; rules of natural justice followed. More powers to banks / ARC to change management. Protection from recovery will not be available without lender consent. Plans for Holding-on operations will have to address needs of security holders. Short term interim managers to handle the restructuring process. Administration and Liquidation with the help of outside agencies. 13
Regulatory Issues Governing Acquirers Acquirers can be Banks, NBFC, ARC. Banks ring fence by setting up ARC s and moving out their stress assets. Reserve Bank is the approving agency for NBFC and ARC. Foreigners setting-up / investing in NBFC and ARC to meet capitalization norms. Stress assets sold through tenders and at times as basket; rule of highest bid. The investment and profits can be repatriated after meeting taxes 14
Regulatory Issues Governing Acquirers Acquirers working outside the Regulatory can acquire: Off-shore instruments like, convertible bonds, etc. issued by Indian companies. Exposure in off-shore entities of Indian company. Recent entry strategies have been: Off-shore fund with an AMC, investing from tax friendly jurisdiction in equity of sick companies, to retire debt default obligations of sick company. ARC to consolidate debt to achieve super majority (working with sitting / hostile management). 15
Integrated Capital Services Ltd. Develops strategies to meet cash flow stress. Draws turnaround Plans. Representation / negotiation of Plans with Lenders / Authorities / Restructuring Board. Implementation of Plans. Related services, M&A and Takeovers. Offices in Delhi, Mumbai. 22 employees / full time consultants. Over 200 man years of Senior Management experience. A Public listed Company. 16