Tea company McLeod Russel moves to settle debts as promoters reduce stake

Most lenders have agree that debt restructuring is right choice and not auction under insolvency for India's largest bulk tea producer

An unexpected buoyancy in tea prices, following crop loss because of the nationwide lockdown, has turned out to be a boon for McLeod Russel India, the country’s largest bulk tea producer, with a majority of lenders achieving con­sensus on debt resolution. According to sources, most of the lenders have reached a consensus that debt restructuring is the right choice and not an auction under the insolvency law. The resolution proposal before the len­d­ers includes a combination of sale of tea gardens, fund infusion by promoter/investor, and restr­ucturing of balance debt.

McLeod’s debt is around Rs 2,000 crore. 

“Le­n­ders have realised that restructuring is the right choice, as in the National Company Law Tribunal route, the haircut could be 50-60 per cent. With restructuring, it will be possible to recover the entire amount over time,” said a source.

At least two meetings have been held in the past two months, while another two are expected soon to resolve the matter. “But, almost all lenders are on the same page,” informed sources.

The fund infusion most likely will be done by an investor who will pick up equity in the firm. The promoters — Kolkata’s Khaitans — hold 18.32 per cent stake in the company after relentless invocation of pledged shares by financiers. As of March 31, 2019, their holding was 42.71 per cent. On Friday, IndusInd Bank invoked 7.5 per cent promoter shares, as McLeod scrip continued to make a steady recovery from the historic lows seen in March, galvanised by the impending debt resolution and buoyancy in tea prices.

McLeod’s debt resolution has been under discussion for more than a year now. To pare debt, McLeod sold 21 estates between 2018-19 and 2019-20 and realised more than Rs 900 crore. However, despite the sale, McLeod happens to be India’s largest tea company, with a volume of 55-58 million kilos (kg). Though funds from the garden sale were used to repay lenders, the firm had not worked out a comprehensive debt-restructuring plan at the time. A holistic solution to the firm’s debt problem is now expected. Lenders were being advised by SBI Capital Markets.

What appears to have swayed lenders to come around this time on debt resolution is that the tea industry is seeing record prices. “A new threshold level is being set as the industry has not seen this kind of shortage. Prices are expected to remain at this level for the next three months,” said sources. However, they added that to make up for the crop losses, prices will have to sustain.

Crop loss because of the lockdown and Assam floods have led to unprecedented shortage. Sources said the shortage at end-July stood at a staggering 175 million kg, which pushed up prices.

The Tea Board data shows that for the week ended July 25, the average tea prices at the Kolkata auction were at Rs 297.64 a kg, compared to Rs 200.66 in the previous year; the average at the Siliguri auction was Rs 241.01 a kg, compared to Rs 142.23 in the previous year. In its Covid-disclosure to stock exchanges, McLeod recently said though the government had allowed easing of restrictions from mid-April in a gradual manner, it had suffered an estimated crop loss of 3 million kg, which represents 7 per cent of its expected annual production. Consequently, the impact of reduced sales for the year was estimated at Rs 63 crore.