September 6th was the deadline set by RBI for the Kamath Committee to advise on debt restructuring of corporate borrowers facing stress due to the pandemic. And they tabled the report with RBI on the 4th of Sept and RBI released it today late in the evening.
What is very good about this report is that they have really thought through and its not a report penned in a hurry-burry. Its not a case of one-size-fits-all kind of arrangement and going sector specific will help better resolution.
Yesterday, the panel set forth financial parameters needed to deal with 26 sectors which have borne the maximum brunt of the pandemic. The sectors –
The following five parameters were selected based on their relevance while considering the Resolution Plan (RP): These are very good as together they represent leverage, liquidity and debt servicing, the main problem areas.
1: Total Outside Liability / Adjusted Tangible Net Worth (TOL / Adjusted TNW) - Addition of long-term debt, short term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities
2: Total Debt / EBIDTA – Addition of short term and long-term debt divided by addition of profit before tax, interest and finance charges along with depreciation and amortisation
3: Current Ratio – Current assets divided by current liabilities
4: Debt Service Coverage Ratio (DSCR) – For the relevant year addition of net cash accruals along with interest and finance charges divided by addition of current portion of long-term debt with interest and finance charges.
5: Average Debt Service Coverage Ratio (ADSCR) - Over the period of the loan addition of net cash accruals along with interest and finance charges divided by addition of current portion of long-term debt with interest and finance charges.
The recommendations of the Committee have been broadly accepted by the RBI. It has specified five specific financial ratios and the sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalising the resolution plans. In respect of other sectors where certain ratios have not been specified, the lenders shall make their own assessment.
The resolution under this framework is to be extended only to those borrowers which were classified as standard and with arrears less than 30 days as at March 1, 2020 are eligible under the Framework.
• The residual tenor of the loan may be extended by maximum 2 years with or without payment moratorium. The moratorium period, if granted, shall come into force immediately upon implementation of the RP.
• The asset classification may be maintained as standard or upgraded to standard subject to the RP being implemented as per the Framework.
• For aggregate exposures greater than Rs. 100 crore, an Independent Credit Evaluation (ICE) to be obtained from any one Credit Rating Agency authorised by RBI.
Conversion of Loans into Securities and Valuation:
• RP to include restructuring / regularization / change in ownership, if any, sanction of additional facilities.
• RP may provide for conversion of debt into equity or other marketable non-convertible debt securities provided amortization and coupon are similar to terms of debt.
• Equity to be valued as per lower of breakup value or DCF value (for unlisted companies) and market price (for listed companies).
• Any other instrument to be valued at Re.1.