Strategic debt restructuring: Banks may face large losses, massive surge in stressed asset of 7 companies
If banks fail to attract buyers for these troubled companies within 18 months, they would face a large Market-To-Market hit on their debt-turned-equity holding, apart from a massive surge in stressed asset formation, says a Religare report
Over the past five months, banks have evoked strategic debt restructuring (SDR) in seven companies carrying total outstanding debt of Rs42,400 crore, says media reports. However, SDR simply kicks the can down the road and without adequate provision, bank may face large mark-to-market (MTM) losses and could witness massive surge in stressed assets, says Religare Capital Markets Ltd, in a research note.
As per media reports, banks have so far evoked SDR in seven companies or projects worth around Rs42,400 crore n in the last five months. This includes, Electrosteel Steels with a debt of Rs10,240 crore, Lanco Teesta (Rs2,400 crore), Jyoti Structures (Rs2,360 crore), Monnet Ispat (Rs11,710 crore), Coastal Projects (Rs3,250 crore), Visa Steel (Rs3,090 crore) and IVRCL at Rs9,390 crore.
"The biggest drawback of SDR is that banks are not required to carry adequate provisions on their exposure. Thus, should they fail to attract buyers for these troubled companies within the stipulated 18-month period (in itself an uphill task), banks would face a large MTM hit on their debt-turned-equity holding in the ailing company, apart from a massive surge in stressed asset formation as the balance SDR-linked debt slips into non-performing assets (NPAs)," the research note says.
"We believe this number will only increase as stress on the economy and on cyclical sectors like metals persists. Of the seven, three companies belong to the metal sector and have a total debt of Rs25,000 crore – given headwinds to the sector in the medium term, banks will find it hard to attract buyers. In the event of a significantly discounted buyout, banks will have to take write-offs on their equity/ debt exposures. We expect large write-offs in reviving not only the three metal companies but also the EPC and power companies," Religare said in the report.
SDR, restructuring and 5:25 – all these schemes merely push back the problem
According to the research note, the biggest drawback of the SDR mechanism is that banks do not carry adequate provisions on their exposure. Equity shares are exempt from MTM and the remaining debt will retain its existing asset classification, i.e. standard restructured assets (with 5% provision) in most cases, it says.
In cases where equity conversion takes place at face value, Religare said, the MTM hit will be very high as the underlying value is far lower (30% in the case of Electrosteel Steels where conversion was at Rs10 vs. the market price of Rs3). According to a report from Financial Express, lenders of the loss making, Kolkata-based Electrosteel Steels have decided to convert Rs2,507.57 crore of loans into shares at Rs10 apiece.
"Banks are currently seeing high slippages from assets restructured two-three years ago. The growing SDR and 5:25 restructuring drive could invite a repeat of this situation. In our view, SDR refinancing should be included in stressed asset formation in order to bring in greater transparency on underlying trends in asset quality," the report added.