Debt recast, demand pick-up to help overcome mismatch in cash flow: Ind-Ra

The proposed debt restructuring programme and a gradual pick-up in demand will help stressed borrowers overcome cash flow mismatches due to Covid-19, stemming from short-to-medium-term liabilities, according to India Ratings.

The rating agency said, “It expects capital market instruments to continue to be serviced, given the diversified nature of holdings and different class of investors”.

The creditors are expected to have a uniform view and the treatment to remain consistent for any restructuring being sought for non-convertible debentures/bonds.

The agency has collated a list of frequently asked questions (FAQs) to put forth its methodology to evaluate the implications of restructuring on its outstanding ratings.

Referring to the economic growth trend, it said the Gross domestic product (GDP) was falling sequentially even before the Covid-19 outbreak due to structural impediments in consumption and investment demand.

Ind-Ra’s downgrade-to-upgrade ratio had peaked in FY20. The agency communicated through its FY21 outlooks in January 2020 that downgrades will continue to exceed upgrades even in FY21.

Post lockdown, certain sectors and entities linked to social distancing and consumer discretionary demand were disproportionately impacted.

These impacted sectors include airlines, airports, hospitality, travel, and leisure. For sectors such as real estate, power, construction, metals and mining, and micro, small and medium enterprises (MSMEs).

The RBI’s released resolution framework for one-time restructuring is applicable only for companies that were classified as standard and were not in default for more than 30 days as on March 01, 2020. These accounts should remain standard till the time of invocation. Lenders may extend the residual tenor of loans, with or without payment moratorium, by over two years and/or provide additional loan sanctions.

The framework also provides for the conversion of debt to equity or other marketable, debt securities issued by the borrower.  Entities that were stressed prior to the lockdown and are necessitating long-term solutions may be restructured under the RBI’s earlier resolution framework of 2019, the rating agency said.