Gamble that paid off

Corporate debt restructuring (CDR) is more like a gamble that bankers resort to, to breathe life back into any debt-ridden company. The idea is to resuscitate the company by pruning interest costs, giving a moratorium on the loan and the interest payments and providing additional loans. If one were to sieve through the companies that got special dispensation under CDR, the gamble has paid off in many cases, helping companies to bounce back, giving an opportunity to bankers to recoup their losses.

Wockhardt is a stellar example of how the CDR process helped the company repay foreign debt and domestic liabilities, saving it from going down under. In the CDR package approved in April 2009, banks restructured a total debt of Rs 3,319.14 crore in Wockhardt.

Since CDR’s inception in 2002, 59 cases with a debt of Rs 48,000 crore exited successfully and 73 cases with a debt of Rs 9,700 crore exited unsuccessfully, after banks rejected the CDR scheme. A senior banker associated with the debt restructuring cases said, “Though only 59 companies exited successfully, the quantum of debt of successful cases overweigh those that exited without success.” Banks have referred about 466 cases with a debt of Rs 2,45,928 crore so far under the special CDR scheme designed by the Reserve Bank of India. Of this, 327 cases with total debt of Rs 1,87,394 crore was approved.

Problems at Wockhardt coincided with the global financial crisis in 2009, when the company defaulted on its foreign currency convertible bonds (FCCBs) and got into trouble with the derivative exposure. In order to meet the dues of the pressing creditors, operational requirements and the derivative losses, the company got a priority loan of Rs 516.50 crore.

When bondholder DBS filed a winding up petition in November 2009 in the Bombay High Court alleging that the secured Indian lenders had designed a CDR package favourable to their interests, ICICI Bank fought shoulder-to-shoulder with the firm.

But bankers say, “Wockhardt cannot be held up as a benchmark case, having to its advantage the ability to sell off a number of non-core assets, which included 10 hospitals to Fortis Healthcare, the animal husbandry business, and nutrition business to Danone. It was given a disinvestment timetable, which asked the company to bring Rs 790 crore by September 30, 2018. Disinvestment was monitored by the asset sale committee, which constituted the CDR lenders.”

The other companies that successfully exited from the CDR could be more of a benchmark. Some of these companies are RPG Transmission, Gobind Sugar Mills, Dhampur Sugar Mills, Jayaswal Neco Industries, and Jyothy.

But, Wockhardt had to its credit of having toed the banks’ line till the very end, and got cash well before the deadlines given by the banks. Officials overseeing the restructuring package from the SBI say, “ Five years ahead of the deadline the company was not just able to bring in the disinvestment proceeds, it is toying with the idea of bringing down the debt burden by prepaying some of the loans.”

The CDR process was initiated in April 2009 for an initial period of 10 years, but the company will exit from the CDR scheme by the end of the financial year 2013, after clearing the recompense fee of Rs 210 crore. A senior banker said, “Of this, Rs 150 crore is already paid and remaining portion is also submitted to the banks, but the formalities of the exit will take a few more months. The account has turned standard enabling the banks to charge the market rates of interest.”

A consortium of banks and institutions that led the CDR were SBI, ICICI Bank, LIC, IDBI, ING Vysya Bank, Bank of India, Punjab National Bank, HDFC Bank, Indian Overseas Bank, Union Bank of India, Federal Bank, Axis Bank and Federal Bank, who jointly had a debt of Rs 1,643.57 crore. Two non-CDR members — Nova Scotia Bank and Birla Mutual Fund AMC representing a debt of Rs 1,775.57 crore — also accepted CDR package, volunteering to accede to the CDR package as acceding lenders.

Monetising the large number of non-core assets also helped the company to repay the $110 million FCCB obligations to foreign lenders, Rs 1,588 crore of derivatives, $250 million foreign currency loans and close to Rs 1,500 crore of domestic liabilities in the form of loans.

During the CDR process, banks extended working capital loans of about Rs 500 crore and Rs 155 crore non-fund-based facilities at interest rate at 10 per cent, where 1 per cent of the interest was converted in 0.01 per cent non-convertible cumulative redeemable preference shares on an annual basis, to be redeemed at the point of exit. One of the rare cases, which got part of the interest converted into preference shares, which have no voting rights. A priority loan of Rs 516 was also sanctioned.

The turnaround for Wockhardt was a concerted effort by a group of bankers led by SBI and ICICI Bank to restructure its loans and offer new working capital loans at lower interest rates. ICICI Bank was appointed as the monitoring institution to oversee the implementation of the CDR package. The bank also got a one-time fee of Rs 100 crore for preparation of the restructuring package and an annual fee of Rs 22.5 lakh.

The company opened a trust and retention account (TRA) with ICICI Bank, and the entire cash flow of the company was routed through this account. A waterfall arrangement was finalised by the lenders whereby each lender got periodic repayments commensurate with their exposure.

The company had issued FCCBs of $110 million in October 2004. The bonds along with redemption premium of 29.58 per cent, aggregating to Rs 674.84 crore were, due for redemption on October 25, 2009, if not converted at the stipulated conversion price of Rs 486.07 per share. But, the company defaulted on the payments and the bondholders refused to give an extension.

Under the CDR package, banks asked the company to approach the bondholders with the offer to subscribe to the preference shares of the company in exchange of their existing bonds the subscription among will be equivalent to the redemption value of the FCCBs, 50 per cent of the said preference shares to be in the form of 0.01 per cent optically convertible cumulative redeemable preference shares and the balance 50 per cent will be 0.01 per cent of non-convertible cumulative redeemable preference shares. The company in a filing to the Bombay Stock Exchange said that it has redeemed Rs 20.85 crore optionally convertible cumulative redeemable preference shares (OCCRPS) on November 27, 2012.

Bankers gave the company an extension of six months to settle with the bondholders. But, the bondholders were unhappy with the offer forcing them to file a winding up petition in the Bombay High Court, accusing the domestic lenders of designing a package suitable to their interest. The strong business model of its drug formulation business, helped banks to have complete faith. It is also one of the rare cases where portion of the interest payments were converted to non-convertible cumulative preference shares, according to banker who designed the package.

A senior banker associated with the CDR process said, “The winding up petition was filed by the foreign bondholders knowing that the company would have cash flows from the sale of various non-core assets.”

In return, Wockhardt promoters had to pledge all unencumbered shares with the CDR lenders and even those encumbered shares had to be pledged to the CDR lenders as when those shares are released by the charge holders. The pledged shares are held by the banks who provided credit lines like working capital term loans, rupee term loans, priority loans, besides putting units in Ankleshwar, Aurangabad, Waluj, Shendre, and Daman. The security was pooled together and held as tangible security by the various lenders. Habil Khrakiwala, the promoter of the company also gave an undertaking that he would always be the single largest shareholder of company during the CDR process.

When Wockhardt shortly exits from the CDR scheme, it would be one of the few companies that accomplished restructuring in the shortest possible time. Banks are used to seeing companies struggling to get out the CDR even after 20 or 25 years. However, now banks have reduced the tenure of the CDR process to just 10 years. Wockhardt’s case may set banks toying with the idea of bringing it down even further.

manjuab@mydigitalfc.com

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