are taking a keen interest in how the Synergies Dooray Automative resolution case
unfolds. For, this could create a precedent for the next set of cases at insolvency proceedings and decide how successful the resolution story turns out to be for lenders.
The central issue in the resolution process is how much of a haircut (write-off) banks will have to take. There can be no one rule for all and depending on the case, this could be as low as 30 per cent or as high as 80 per cent. However, in the Synergies Dooray case, the haircut was 94 per cent. Bankers
are hoping this was an exception.
Synergies Dooray was considered the first successful debt recast case at the insolvency proceedings under the new rules in this regard. Edelweiss ARC has challenged this resolution. The argument is that the promoters, through a complex structure, became majority operational creditors of the company and thus passed a resolution process that favoured a steep haircut.
“If the Synergies Dooray resolution is okayed by the appellate tribunal, bankers
would obviously want cases to be resolved much before these move on to the liquidation stage,” said a senior official of a large public sector bank. “If this is set as the precedent, it is possible that many such cases could come up in the future and banks could end up with nothing.”
The insolvency code doesn’t prevent a promoter group or anyone else from presenting a resolution plan. Any such plan has to be approved by the majority of the creditors. Bankers
are now saying promoters turning out to be the majority of creditors, through smart structures, is a rude shock to them.
“There are ways of making sure that the resolution plans or the bidding process remain constrained to a few players and that the promoter’s plan look the most attractive. This is going to be a major concern for banks,” said another senior banker.
Adding: “It is unlikely that outside investors would be interested in a company if there is not much actual realisable value. In this scenario, if promoter affiliates present a case where the value offered is a little higher than the realisable value, that plan becomes acceptable. This is going to be a reality for a majority of smaller accounts.”
are also silently changing the way they plan to take securities against a loan. Typically, banks take current assets and fixed assets such as land and equipment as mortgage before extending a loan. However, when a company incurs losses, the value of current assets erodes swiftly. Cash and such liquid assets that would turn into cash in a year get used up by a company when in stress. Equipment, being a depreciating asset, also falls in value. So, the land and buildings are left to realise the value in a liquidation. This is where bankers
fear promoter groups would always triumph if they get a chance to present their resolution plan.
However, in big accounts, chances of the promoter group coming back are most unlikely. Such companies, in all likelihood, would be sold off on a piecemeal basis.
Still, considering the large haircuts involved, it does make sense for banks to restructure loans and look for buyers even before the liquidation stage, Macquarie Research analyst Suresh Ganapathy wrote in a recent note. He says cases such as Synergies Dooray “certainly can’t be extrapolated,” but “clearly the worry is that haircuts in general will be large”.
Analysing five steel companies, originally named in the June list of 12 large bad loan accounts by the Reserve Bank of India for insolvency proceedings, Ganapathy said haircuts of 40-74 per cent could be needed. Translating into an average of 57 per cent.
agree that the average haircut could be 50-60 per cent in insolvency cases. However, most of these are still about six months away and so a clear view cannot be formed, they say.
Analysing the debt and net realisable value of the largest steel cases (Bhushan Power & Steel, Bhushan Steel, Monnet Ispat, Essar Steel, Electrosteel), Ganapathy said banks might have to take as much as a 74 per cent haircut on Bhushan Power & Steel. The company owes banks Rs 40,973 crore. In the case of Electrosteel Steel, where the total exposure is Rs 12,872 crore, the banks would be relatively better off by taking a haircut of 43 per cent.
Those estimated for banks in case of Bhushan Steel would be 55 per cent, Monnet Ispat at 51 per cent and Essar Steel at 40 per cent. Macquarie said the reason for this assumption was that given the current demand environment, steel players bidding for these assets might place bids at $650-750 per tonne, which in most cases were less than half the total debt on a per-tonne basis.
Macquarie’s findings are similar to CRISIL estimates that had said banks could have to take ‘deep haircuts’ of more than 75 per cent of the debt value in certain cases. According to CRISIL, the average haircut in the top 50 stressed accounts work out at around 60 per cent. And, that except for telecom, certain infrastructure projects and food products, banks will have to take an aggressive haircut in almost all companies, across sectors.
Macquarie said banks are carrying 30-40 per cent provisioning in their account books against the steel sector's bad debt. If the provision coverage ratio for corporate lenders were to rise to 70 per cent, it would bring down the core tier-1 capital adequacy ratio to below the minimum threshold level, beside wiping out FY18 operating profits.