Banks to take a haircut for insolvency of non-performing assets

49 indebted firms have debt of Rs 2.8 lakh cr, backed by Rs 1.67 lakh cr of fixed assets

Banks may have to accept huge haircuts if they sell assets of financially stressed firms under insolvency provisions because a significant part of the loans on the books of the most indebted firms are not backed by tangible fixed assets. 

Many of these firms used only a part of bank loans to create assets, while the rest was used to fund working capital or cash losses, which cannot be recovered in a fire-sale of assets. In all, the debt exceeded fixed assets for 49 of the 85 most indebted firms in 2016-17. In 2015-16, 42 of the 67 most indebted firms were in this situation. The 2016-17 count is based on unaudited figures, which may not include consolidated debt, while the numbers for 2015-16 are based on audited balance sheets. 

These 49 highly indebted firms had a total outstanding gross debt of Rs 2.8 lakh crore at the end of March 2017, backed by Rs 1.67 lakh crore of fixed assets on their books.

The corresponding figure for these firms was Rs 2.66 lakh crore and Rs 1.71 lakh crore in 2015-16.

“Many firms used bank loans to fund cash losses or to create working capital as revenue growth and profitability plummeted in the last 2-3 years. This was true in capital-intensive sectors such as metals, power, infrastructure and textiles,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

Companies with the largest gap between debt and assets include Videocon Industries, Tata Tele (Maharashtra), MTNL, Alok Industries, Punj Lloyd, Gayatri Projects, Parsvnath Developers, Patel Engineering, Hindustan Construction, and Bhushan Steel.

The situation is likely to worsen as the combined net losses of 49 companies with inadequate assets was up by around Rs 7,500 crore in 2016-17, while the assets on their books were down by around Rs 4,000 crore. In comparison, their gross debt was up by around Rs 13,500 crore in 2016-17.  

The gap between debt and underlying assets is likely to widen with audited financial statements for 2016-17. The current numbers are based on unaudited results, which do not include the numbers for subsidiaries. “In general, if loans are not backed by matching assets, it is tough for lenders to recover their money in an asset sell-off,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

According to him, only in cases of cement assets or infrastructure assets such as airports will buyers be willing to pay a premium over their historical value, thereby allowing banks to recover their dues even if the loans exceed the book value of assets in the companies’ balance sheets. 

A case in point is the contrast between the balance sheet of Jet Airways and Kingfisher Airlines. At its high in 2008-09, Jet Airways had around Rs 17,000 crore of gross debt backed by nearly Rs 20,000 crore of fixed assets net of accumulated depreciation. In comparison, Kingfisher Airlines last reported gross debt of around Rs 9,400 crore backed by fixed assets of Rs 700 crore at the end of 2012-13.

The Vijay Mallya-promoted Kingfisher Airlines never made any net profit in its history and reported operating losses in nine out of its 13 years of operation. Bank loans were used to fund these losses rather than acquire assets. 

“Obviously, banks have failed to recover anything from the defunct airline but Jet Airways sold assets to tide over tough times and is operating successfully,” said an analyst on condition of anonymity. 

Lenders now want Mallya to repay Kingfisher Airlines’ dues.

A similar situation is developing in many highly indebted firms. A little over a quarter of Videocon Industries’ gross outstanding loans on a standalone basis were backed by fixed assets at the end of 2016-17. The loan to asset coverage ratio is 11 per cent in case of Tata Tele (Maharashtra), 35 per cent for MTNL, 17 per cent for Punj Lloyd, 70 per cent for Alok Industries and 50 per cent for Hindustan Construction. For realty and construction firms such as Gayatri Projects, IVRCL and Parsvanath Developers, the coverage ratio is in the single digits. (See chart) 

The only possibility of bankers recovering higher dues will be in cases where companies have a market value of assets higher than what is recorded in their books, which typically happens in real estate holdings. Analysts expect banks to take large haircuts for their exposure to these companies. “Banks should brace for haircuts of 50-70 per cent if they conduct a fire-sale of whatever assets are left with some of these companies. This will create a hole in their balance sheets that will have to be filled by the government eventually,” Emkay Global’s Sinha said.

He added most of the indebted firms had already sold saleable assets such as cement units, power-generating units and prime real estate. They are now left with assets which either have few buyers or will fetch low prices due to overcapacity such as steel plants.

For example, Bhushan Steel’s assets to loan coverage ratio is 93 per cent. However, for lenders to fully recover their dues, its assets should fetch the same price as the current market capitalisation of JSW Steel, a profit-making company five times the size of the former in terms of revenue.

*Fixed assets defined as net block plus capital work in progress minus accumlated depreciation; $ Loan coverage ratio is the proportion of gross loan outstanding at the end of FY17 backed by fixed assets; Sample of 49 out of 85 most indebted companies whose loans exceeded fixed assets in FY17 from universe of BSE 500, BSE Midcap, and BSE Smallcap indices; Compiled by BS Research Bureau. Source: Capitaline