Restructuring 2.0 - The Need Of The Hour?
As the country emerges from a harrowing lockdown that has brought corporate India to its knees, it goes without saying that a long and long and arduous journey towards economic rehabilitation has only just begun. The next few months will require intense, focused intervention from the government to ensure that the majority of companies are able to emerge from the crisis with no more than just a few blows to the face.
Earlier today, Centrum Capital organized a timely webinar titled ‘Restructuring 2.0 –Corporate Sector seeks Restructuring’. The purpose of the session was to seek expert views on the broad impact of COVID 19 on domestic corporates, and whether or not a “Restructuring 2.0” is in order at this point in time. The elite panel of speakers comprised of Ananda Bhoumik, Managing Director and Chief Analytical Officer at India Ra, P.R Rajagopal, Executive Director of Bank of India, R. Gandhi, Former Deputy Governor of the RBI, and Ajay Shaw, Partner at DSK Legal. Jaspal Bindra, Executive Chairman, Centrum Group presided over the session.
Bindra kicked off the session by addressing the elephant in the room – with an event that has obviously led to a “permanent loss of a few months’ productivity” for Indian corporates, are the present reliefs really enough to cover the losses incurred by them?
“The recession staring us in the face is different from the previous ones (1958,1966 and 1980), which were all due to the same reason – a monsoon shock that hit agriculture. This time it’s different, as agriculture GDP is likely to cushion the blow to non-agriculture GDP, which is expected to contract by 6%, and global disruption has the potential to hurt exports as well”, noted Bindra.
Bindra also observed that despite the jaw dropping size of the government relief package, most of it is either in the form of loans and guarantees which at best does nothing more than ‘kick the can down the road’, or in the form of reforms, which will not pay off immediately. “The actual fiscal cost is only around 1%, which appears inadequate. In other developed markets, federal banks have moved to directly buy corporate bonds in order to calm the financial markets”, he said, while also noting that due to factors like migrant labour and social distancing, manufacturing units will not be able to achieve capacity utilization for a long time to come, even after the lockdown is filly lifted.
Bhoumik of Ind Ra began by stating that corporate India entered this shock at a time when its cards were already relatively weak. “There has been a global and local slowdown over the past 3 years, during a time when corporates were deleveraging. The questions rating agencies will be asking are – what is the extent of the current shock, and what is the depth of the shock?”, he said, while admitting that both are extremely difficult to predict.
Bhoumik presented a simple and elegant framework they are using at Ind Ra to predict the extent of the troubles that different sectors would face as a result of the COVID crisis. “On one end of the spectrum, we have Essential & non-cyclical sectors such as telecom, pharmaceuticals, healthcare, fertilizers and gas that are likely to be least impacted and are expected to bounce back faster. On the other end of the spectrum, we have consumption related companies whose very fundamental viability may be questioned as a result of this pandemic – discretionary big ticket spends that may be postponed, and industries like travel and hotels which will be affected by sticky behavioural changes”, he noted.
Bhoumik went on to state that In the middle, we have non-discretionary consumer goods - utilities like paper, chemicals etc that may bounce back in a couple of quarters, and lastly we have industrial goods & services and cyclicals such as steel and cement, that may take a but longer to come back to normal. “In terms of liquidity and interest coverage, AAAs and AAs are reasonably comfortably placed, while single A’s and below are going to be most impacted. We are expecting a higher than usual default rate in the BBB and below space, as they have been most heavily impacted both from the demand and supply side”, he predicted, continuing that “within NBFC’s, we expect Mortgage Loans to be least impacted, while small business loans, unsecured loans, or loans related to used vehicles would have a longer recovery cycle – unless bank support reaches them in time, some of them may even face solvency issues”.
Bindra went on the ask Gandhi – “Can normal yardsticks apply during these times, when businesses have been hit across the board in no way that could have been envisaged by issuers or lenders? There is a strong demand from the industry for a one-time restructuring. Are we ready for that?”
Gandhi began by observing that there has indeed been a massive surge in systemic liquidity of nearly 8 lakh crores, and a lot of this is targeted liquidity. “However, I subscribe to the view that there should a Restructuring 2.0 at this stage, given the pervasive impact of the COVID 19 crisis on the economy. The moratorium has done nothing more than temporarily ease the liquidity situation of borrowers. Come September, the problems will come back, because all the accumulated dues will become payable”, he cautioned rightfully.
Clearly voting in favour of Restructuring 2.0, Gandhi went on to define some pertinent elements of Restructuring 2.0 - should it come to pass, stating that we need to adopt a “different approach” from the one adopted during the GFC.
“First, it should be non-discretionary – banks and NBFC should not have the discretion to deny restructuring demands. Second, it should be non-discriminatory – that is, it should be applicable to all sorts of borrowers. Third, there must be no conditionality in terms of ownership, promotership, and the like. Fourth, the restructuring should compulsorily involve some element of a debt – equity swap. Fifth, the time frame should be restricted to no longer than three years, and restructuring should not be categorized as NPA”
Taking centre stage next, Rajagopal of Bank of India offered his view that a lot of stress in the banking books is just “legacy stress” that they have been carrying forward.
“Discretionary and cyclicals were facing continued stress even before COVID 19, and so restructuring would be very difficult for banks to conduct in these spaces. Other sectors will pick up over time and not really need restructuring, but rather just an elongation of payment schedules.”, he noted.
Shaw from DSK Legal concluded the webinar with a legal perspective on the matter. “The RBI circular is only binding on banks and financial institutions. It is important to understand that debt also comes from other sources such as Mutual Funds and External Commercial Borrowings. These debts are required to be sorted out contractually, as the RBI circular does not technically apply to them”, he said.
Shaw observed that the moratorium period is a temporary respite to the corporate debtor, but the question that hangs in the air is whether these corporates would have the financial strength to discharge their interest payment obligations once the moratorium period is over. “A one-time restructuring package could be considered for two situations – one, for companies that have been impacted by COVID 19 on a case specific basis and two, because we need an open canvas to allow lenders to try and arrive at a restructuring through a contractual mechanism”, he said.
The webinar concluded with questions from the 900 odd participants who has attended the vibrant and informative session.
