In what is a triple whammy week for the Kolkata-based SREI group, rating agencies CARE and Acuité Ratings & Research have downgraded SREI Infrastructure Finance Ltd (SIFL) to default category. Separately bondholders and the debenture trustees of SREI group have approached the National Company Law Appellate Tribunal (NCLAT) challenging an order passed by the Kolkata bench of National Company Law Tribunal (NCLT). The rating downgrade comes amidst significant disruption in the business activities of SREI Equipment Finance Ltd (SEFL) including sharply lower loan disbursements and collections during the current year against the backdrop of its ongoing debt realignment under the NCLT process.
In an order issued on 30 December 2020, NCLT had directed rating agencies to maintain SEFL’s rating at least in investment grade till 30 June 2021. In view of the
earlier NCLT order, CARE Rating was restrained from treating the non-payment of interest and principal as a default. However, the ratings agency approached the National Company Appellate Law Tribunal (NCLAT) seeking a stay on the NCLT order.
On 2nd March, NCLAT passed an interim order staying the last sentence of impugned provision of para 34 of the NCLT order pertaining to credit rating agencies till 5 April 2021. Accordingly, on 6th March, CARE recognised default and revised its ratings on SIFL due to ongoing delays in debt servicing obligations by the company.
In its report, CARE pointed out that key subsidiary SREI Equipment Finance Ltd (SEFL) reported net loss of Rs3,784 crore during the third quarter of FY20-21 (Q3FY20-21) and Rs3,762 crore for first nine months of FY20-21 (April to December 2020) (9MFY2-21) due to accelerated provision of Rs1,542 crore. This has resulted in significant reduction in consolidated net-worth and successful restructuring of debt remains critical, CARE said.
While downgrading, CARE has noted that successful restructuring of debt and sustained improvement in liquidity and collection efficiency leading to timely debt servicing along with improved asset quality and profitability could lead to positive rating action/ upgrade, provided the capital adequacy ratio (CAR) remains above regulatory requirement on a sustained basis.
It is learnt that Ashwini Kumar, who is an independent director on the board of SREI Equipment Finance Ltd (SEFL), is one of the committee members at CARE Rating. But to comply with the regulations, he did not participate in the rating process and in the committee meeting.
On 15 January 2021, Acuité had revised its rating on debt instruments of SEFL to ‘ACUITE BBB-’ with rating watch negative from ‘ACUITE BBB’ with rating watch negative. On 5th March, Acuité further revised the long-term rating on the Rs3,492.45 crore non-convertible debentures (NCDs) of SEFL to ‘ACUITE D’ from ‘ACUITE BBB-’.
Acuité has noted that SEFL had put the interest and principal repayments of the outstanding NCDs on hold for six months starting 1 January 2021 in line with the NCLT order.
According to the ratings agency, a prolonged debt resolution process will have a further impact on the business and financial position of SEFL that has already been constrained by weaker capital adequacy and higher asset liability mismatches. For H1FY2021, SEFL reported a profit after tax (PAT) of Rs21.86 crore, which is significantly lower compared to Rs84.50 crore in H1FY19-20.
Brickwork Ratings is also known to have approached NCLAT to challenge the NCLT order but for now, continues to hold the rating as BWR BBB under rating watch with negative implications.
Separately, the next hearing for the case filed by SREI group’s bondholders, along with
Axis Debenture Trustee Services and Catalyst Trusteeship Ltd is now scheduled for 23 March 2021. Axis Debenture Trustee and Catalyst Trusteeship are challenging the order passed by Kolkata bench of NCLT, which allowed SREI to skip repayments to bondholders for six months till 30 June 2021 and granted a blanket moratorium. Axis Trustee Services and Catalyst Trusteeship, which represent bondholders, have jointly moved NCLAT contending that the NCLT order has impacted retail and institutional investors alike.
“Senior counsel for the respondent submits that due to some difficulty, they could not file the documents. Let the matter be fixed ‘for admission’ (after notice) on 23 March 2021," the NCLAT said in its order on 4 March 2021.
A spokesperson for SREI group, told Moneylife, “We believe the recent rating action is blatantly wrong, misleading and baseless. The rating agency has recognised default arbitrarily even though there is no default in terms of the order dated 30 December 2020 passed by the NCLT, Kolkata bench in an application filed under Section 230 of the Companies Act, 2013. SREI has already given a plan where payment will be done in a structured manner. CARE and Acuite did not take cognisance of these facts, did not interact with the company or made any effort to understand the situation.”
The company spokesperson also maintained that “SREI has sufficient assets and cash balances to make repayment to all its creditors in an orderly fashion. We are in the process of availing appropriate legal remedy, among others, to set aside the rating since we believe that CARE and Acuite have acted in a wrongful and contumacious manner.”
A prominent lawyer, who handles NCLT matters, explained problems with infrastructure sector lending. He says “We have witnessed several instances where a corporate debtor committed default and was taken into insolvency because the corporate debtor could not recover its dues from its own creditors.”
Sources claimed that the company has around Rs700 crore in current accounts with banks and indicated that it has sufficient liquidity. The total debt of the company is said to be around Rs28,000 crore as on 30 December 2020.
SIFL had given effect to the slump exchange for transfer of its lending business, interest earning business and lease business (transferred undertaking) including external borrowings, to its wholly- owned subsidiary SEFL in its accounts for the quarter ended 31 December 2019 with effect from 1 October 2019. Though SIFL has transferred the rated debt to SEFL in the financial statements, there has been continuing uncertainty involved with the slump exchange, since consent from all the lenders has not been obtained.
The collections of SEFL (including transferred book of SIFL) were significantly impacted due to impact of COVID-19 over the last one year and the Reserve Bank of India (RBI) directive on restructuring of loans option available to the customers of SEFL. As per RBI guidelines, SEFL only has the option of restructuring in its assets and not in liabilities which the company claims has impacted its asset liability maturity (ALM) profile.
A large proportion of borrowers of SEFL sought for one-time restructuring of their loans, which has resulted in cash flow mismatches for SEFL. This has forced SEFL to enter an arrangement with the secured creditors. The proposed meeting of creditors is yet to happen and there are ongoing delays and default on the borrowings availed by SIFL (transferred to SEFL in books).
Further, according to sources, after months of dilly-dallying, public sector bank (PSBs) lenders have finally set the debt restructuring process for SREI in motion by hiring forensic auditors and exploring all possible solutions for the restructure of lending operations. Lenders of the SREI group are also said to be weighing all options including contemplating a change in ownership as they look to work on the ongoing efforts of debt realignment.
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