WILL SDRs SUCCEED OR JUST A WAY TO PROLONG THE INEVITABLE?

By Ruma Dubey

For the past few days, beleaguered, debt ridden stocks have been in the limelight. First was Electrosteel Castings. Then others followed – Jyoti Structures, Monnet Ispat, Lanco Teesta, Gammon India and VISA Steel. What do all these companies have in common, apart from the sudden push into limelight?

They all are SDRs. Strategic debt restructuring companies. First CDR and then SDR. So why does the market fell happy about it? Well, it celebrates when companies are approved for CDR or this is another step forward. Under SDR, the lenders say enough is enough and decide to do the final recast of the company’s debt. It takes control by converting debt into equity, usually a minimum of 51% stake or some times more. Within 30 days of the review of the company’s account, lenders can now convert debt into

Last week, we saw two companies announcing SDRs – first Monnet Ispat and then IVRCL.

First was Monnet Ispat wherein lenders invoked SDR. The company is sitting on a consolidated debt of over Rs.12,500 crore and the debtors have decided to convert their unsecured loans into equity shares, giving them a major stake in the company. They plan to convert Rs.368 crore worth of outstanding debt into equity at Rs.40/share, translating into a 51% stake. The lenders will then be able to sell this stake to a new promoter within the next 18 months. The existing management will continue to run the operations.

IVRCL also announced that its CDR Lenders have informed the Company yesterday night i.e. November 30, 2015 that at the Joint Lenders Forum (JLF) held on November 26, 2015, the Lenders have invoked Strategic Debt Restructuring (SDR) in the Company and adopted the “Reference Date” for the purpose as November 26, 2015.

This was an expected move as the company, in October’15, under the CDR, had allotted 1.5 crore equity shares of Rs.2 each at issue price of Rs.24.39 to International Asset Reconstruction Company Pvt Ltd (a Corporate Debt Restructure lender) who had inked the master restructuring agreement when the loans were recast.  This allotment was to facilitate conversion of Fixed Interest Term Loan into equity, for the period of December 1, 2013 to August 31, 2015. The company is sitting on a debt of over Rs.7000 crore and this was the only recourse available. As such, currently lenders are holding 39.85% stake in the company and promoters stake is at just 8.28 equity.

Prior to that in Gammon India, lenders decided to convert part its Rs.15,000 crore debt into equity in a prelude to changing its management under SDR.

In September’15 we saw that the JLF decided to invoke SDR in VISA Steel for preparing a conversion package to enable inviting a strategic investor in its Special Steel Business. The company at end of FY15 had a consolidated debt of Rs.3100 crore.

In August, we saw lenders announcing the SDR for Jyoti Structures which had a stand-alone debt of Rs.2,356 crore. And the latest in the company is that lenders have decided to convert Rs 308 crore of loans into shares at a value of Rs 26.90/share,  a premium to the current market price.

And in October we had seen Lanco Infra’s power unit -  Lanco Teesta Hydro Power getting into the SDR. This company is in the process of setting up a 500 megawatts (MW) hydropower plant on the banks of river Teesta in Sikkim and debt worth some Rs.2400 crore are at stake.

Electrosteel Castings is the pioneer in this SDR taking off. The first in 2015 where lenders agreed to convert a part of its Rs.10,235 crore debt into equity. The banks have been trying hard to sell the stake and a new management was to be in place by Sept, which obviously has not happened. But news is that Tata Steel was leading the race for this takeover but it has asked for a very low price for taking over, which is not acceptable to the banks. Thus rumours are that Tata Steel is off the race. Others being considered are DP Jindal group company, Brazil-based Gerdau and UK-based First International Group Plc (FIG). Lenders say that they will be able to finalise the buyer by January’16.

The success of one SDR is essential for one to have some faith in this entire concept of SDR. Yes, companies will be available at throwaway prices but right now not many are biting because the prospects of these industries – mainly steel and power is very poor. Thus when the macro picture itself is not too enticing, why will they come and take over another debt ridden company?

In good times, we can sell even rotten tomatoes as apples but when the chips are down, no one is interested in buying even tomatoes. Hence it is imperative for at least one company in this SDR scheme to show that it has found a buyer. Till date, not a single lender has been able to sell stake under SDR.

Yes, it is too early to throw out SDR out of the window. But a buyer at this juncture in one company to begin with is essential or else, the entire point of SDR is lost. It would then be like prolonging a brain dead person by putting him on a ventilator as the consequence is well known.