Corporate debt restructuring (CDR) can be defined as the reformation of the existing obligations of a company. This is done by increasing the time needed to pay the debts back and bringing down the rates. This also lets the company add to its capability to pay its debts. In some cases, the creditors forego certain amounts of the debt amount in lieu of equity positions in the organization.
From an economic point of view, CDR can also be described as a proactive measure to not let companies land into a troublesome financial situation from where they cannot make a recovery. It can be explained as a voluntary and non regulatory method for organizations to deal with their dues.
When do you need corporate debt restructuring?
A company has to go for debt restructuring when it is facing financial problems and is thus unable to honor its debt commitments. If the problems are potent enough to lead it to bankruptcy, it can go into negotiations with the creditors for reducing its debt and thus avoid such possibilities.
What are the advantages of corporate debt restructuring?
One of the founding principles of this benefit is that if it is done in a clear and time efficient manner it can make sure that companies stay viable irrespective of external or internal factors. This is pretty important for the corporate sector as well.
What methods are followed in corporate debt restructuring?
Following are certain methods that are followed for corporate debt restructuring:
- changing yet-to-be serviced parts of interests to term loans
- management restructuring
- re-phasing recovery programs
- equity capital reduction
- reducing margins
- changing debentures to equity
- reassessing credit facilities such as working capital
- procuring extra money for repaying loans
Importance of corporate debt restructuring in India
Judging from the present financial situation, CDR cannot be called just a fashion for the Indian business fraternity. In the last couple of years this sector has received a lot of attention from the media.
The Reserve Bank of India had set up a proper system for this purpose almost 5-6 years back. The number of companies taking recourse to this has increased over the years and this has made it one of the prominent features of the Indian finance and banking scenario.
Which companies have availed corporate debt restructuring?
Recently, some of the major names in the Indian business fraternity have sought refuge from the corporate debt restructuring set-up:
- Vishal Retail
- Sakthi Sugars
- India Cements
- Jindal Steel
- Essar Steel
Why do Indian companies need to avail corporate debt restructuring?
It has been calculated that in India 60 percent of the aggregate industrial investments are meant for corporate debt restructuring. Economic experts are of the opinion that from a macro perspective this is the biggest restructuring that has been ever attempted.
The major reason behind this situation is the increasing debt being accumulated by the companies and their decreasing profits, which has contributed to the rising debt levels as well. India, as a national economy, has been able to perform better than what was expected but continued exposure to the global financial crisis has taken its inevitable toll on the various sectors. Thus it can be expected, that in the days ahead, CDR will play an important role in Indian economy.
How can a company qualify for corporate debt restructuring?
Any organization can qualify for the CDR if a minimum of 75 percent of its investors, in terms of value, and at least 60 percent of investors, in terms of number, are willing to seek a solution to the issue.
How the CDR cell has helped Indian companies?
Within 2001 and 2005 the CDR Cell has dealt with 138 cases where the total debt was more than 75,000 crore rupees. 75 percent of these cases were successfully completed with the companies able to meet their debt obligations.
In 2009, by December-end the cell had received 208 cases where the total amount stood at INR 90,888 crores. From this 29 cases, which had a total tally of 5018 crores were not accepted – 173 cases where the aggregate amount was INR 84,510 crores were executed as per the program. These proposals were from different parts of the industry. There was a 300 percent increase in the number of cases the cell got in 2009-10 from 2008-09.
CRISIL states that by March 2013 the banks might have to issue such loans worth INR 2 trillion. During April 2012, the CDR cell has got 14 proposals for restructuring debts. Eight of these companies are textile organizations from the Tayal Group. The other companies are ICOMM Tele Limited, PCH Retail, and Surya Alloy Industries Ltd.
Following are some companies who have received CDR benefits:
- GTS Infrastructure – a group specializing in telecom towers
- Deccan Cargo and Express Logistic – set up by Captain Gopinath
- BASIX – microfinance organization
- Bharati Shipyard
The companies mentioned below are waiting to receive approval for their CDR applications:
- Hotel Leelaventures
How Indian companies are making preparations for CDR?
ICICI Securities Ltd has appointed L Govind to lead with its CDR and structured products division. He was previously working for Reliance Capital Limited where he was responsible for monitoring RCL’s corporate investments. Indian companies are now beefing up their CDR capabilities as the credit quality of the corporate sector is facing a critical issue because of the following situations:
- lesser profits
- unyielding liquidity
- feeble demand
Moser Baer Solar has recently applied to the CDR Cell with a debt of INR 739 crores and this is expected to give the solar power industry in India a major shock as it is one of the big names in the domain. It is a Moser Baer India subsidiary. Moser Baer Photo Voltaic, which is another subsidiary of Moser Baer India, has a debt of INR 823.63 crores and has been approved by the cell during January 2012.
The solar energy industry in India has been facing several problems as a result of the problems arising in the European market. The Italian government, which is an important market, has had to revise its solar policy – supply has outgrown demand and there has been a 50 percent reduction in prices. During February 2012, the banks have permitted debt restructuring for the organization – their exposure to the company was worth INR 2000 crores.
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Last Updated on 5/7/2012